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FIRST COMMONWEALTH FINANCIAL CORP /PA/ - Quarter Report: 2012 June (Form 10-Q)

Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

Or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to            

Commission File Number 001-11138

First Commonwealth Financial Corporation

(Exact name of registrant as specified in its charter)

 

Pennsylvania    25-1428528
(State or other jurisdiction of    (I.R.S. Employer
incorporation or organization)    Identification No.)
22 North Sixth Street, Indiana, PA    15701
(Address of principal executive offices)    (Zip Code)

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 by 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨    Accelerated filer  x    Smaller reporting company  ¨    Non-accelerated filer  ¨

(Do not check if a smaller reporting company)

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 August 2, 2012, was 104,724,846.


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

INDEX

 

          PAGE  

PART I.

  

Financial Information

  

ITEM 1.

  

Financial Statements and Supplementary Data

  
  

Included in Part I of this report:

  
  

First Commonwealth Financial Corporation and Subsidiaries

  
  

Condensed Consolidated Statements of Financial Condition (Unaudited)

     3   
  

Condensed Consolidated Statements of Income (Unaudited)

     4   
  

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

     5   
  

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

     6   
  

Condensed Consolidated Statements of Cash Flows (Unaudited)

     7   
  

Notes to Unaudited Condensed Consolidated Financial Statements

     8   

ITEM 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      43   

ITEM 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     66   

ITEM 4.

  

Controls and Procedures

     66   

PART II.

  

Other Information

  

ITEM 1.

  

Legal Proceedings

     67   

ITEM 1A.

  

Risk Factors

     67   

ITEM 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     67   

ITEM 3.

  

Defaults Upon Senior Securities

     67   

ITEM 4.

  

Mine Safety Disclosures

     67   

ITEM 5.

  

Other Information

     67   

ITEM 6.

  

Exhibits

     68   
  

Signatures

     69   

 

2


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

 

     June 30,
2012
    December 31,
2011
 
    

(dollars in thousands,

except share data)

 

Assets

    

Cash and due from banks

   $ 82,659      $ 74,967   

Interest-bearing bank deposits

     3,839        3,511   

Securities available for sale, at fair value

     1,159,202        1,142,776   

Other investments

     35,916        39,796   

Loans held for sale

     0        13,412   

Loans:

    

Portfolio loans

     4,159,531        4,043,643   

Allowance for credit losses

     (61,676     (61,234
  

 

 

   

 

 

 

Net loans

     4,097,855        3,982,409   
  

 

 

   

 

 

 

Premises and equipment, net

     66,740        66,755   

Other real estate owned

     19,140        30,035   

Goodwill

     159,956        159,956   

Amortizing intangibles, net

     3,101        3,843   

Other assets

     318,408        323,662   
  

 

 

   

 

 

 

Total assets

   $ 5,946,816      $ 5,841,122   
  

 

 

   

 

 

 

Liabilities

    

Deposits (all domestic):

    

Noninterest-bearing

   $ 823,880      $ 780,377   

Interest-bearing

     3,638,082        3,724,307   
  

 

 

   

 

 

 

Total deposits

     4,461,962        4,504,684   

Short-term borrowings

     474,264        312,777   

Subordinated debentures

     105,750        105,750   

Other long-term debt

     75,370        101,664   
  

 

 

   

 

 

 

Total long-term debt

     181,120        207,414   

Other liabilities

     56,980        57,704   
  

 

 

   

 

 

 

Total liabilities

     5,174,326        5,082,579   
  

 

 

   

 

 

 

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, 200,000,000 shares authorized; 105,563,455 shares issued at June 30, 2012 and December 31, 2011 and 104,728,846 and 104,916,994 shares outstanding at June 30, 2012 and December 31, 2011, respectively

     105,563        105,563   

Additional paid-in capital

     365,541        365,868   

Retained earnings

     307,466        294,056   

Accumulated other comprehensive income, net

     2,834        2,001   

Treasury stock (834,609 and 646,461 shares at June 30, 2012 and December 31, 2011, respectively)

     (8,314     (7,345

Unearned ESOP shares

     (600     (1,600
  

 

 

   

 

 

 

Total shareholders’ equity

     772,490        758,543   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 5,946,816      $  5,841,122   
  

 

 

   

 

 

 

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

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

     For the Three-Months Ended
June 30,
    For the Six-Months Ended
June 30,
 
     2012     2011     2012     2011  
     (dollars in thousands, except share data)  

Interest Income

        

Interest and fees on loans

   $ 46,408      $ 49,379      $ 94,448      $ 100,262   

Interest and dividends on investments:

        

Taxable interest

     8,279        8,558        16,828        16,932   

Interest exempt from federal income taxes

     5        13        10        199   

Dividends

     19        12        40        29   

Interest on bank deposits

     1        27        2        36   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     54,712        57,989        111,328        117,458   

Interest Expense

        

Interest on deposits

     5,643        9,093        11,890        18,629   

Interest on short-term borrowings

     279        178        506        363   

Interest on subordinated debentures

     1,422        1,386        2,855        2,769   

Interest on other long-term debt

     450        447        989        943   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest on long-term debt

     1,872        1,833        3,844        3,712   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     7,794        11,104        16,240        22,704   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

     46,918        46,885        95,088        94,754   

Provision for credit losses

     4,297        9,112        8,084        22,929   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income after Provision for Credit Losses

     42,621        37,773        87,004        71,825   

Noninterest Income

        

Changes in fair value on impaired securities

     (1,323     448        175        2,317   

Non-credit related losses (gains) on securities not expected to be sold (recognized in other comprehensive income)

     1,323        (448     (175     (2,317
  

 

 

   

 

 

   

 

 

   

 

 

 

Net impairment losses

     0        0        0        0   

Net securities gains

     0        1,608        0        2,185   

Trust income

     1,607        1,764        3,149        3,482   

Service charges on deposit accounts

     3,737        3,748        7,239        7,174   

Insurance and retail brokerage commissions

     1,670        1,616        3,094        3,178   

Income from bank owned life insurance

     1,459        1,390        2,904        2,747   

Gain on sale of assets

     1,444        1,251        3,559        1,482   

Card related interchange income

     3,285        3,042        6,399        5,842   

Other income

     2,894        2,645        7,132        5,302   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     16,096        17,064        33,476        31,392   

Noninterest Expense

        

Salaries and employee benefits

     22,363        21,546        44,121        42,674   

Net occupancy expense

     3,303        3,495        6,707        7,227   

Furniture and equipment expense

     3,024        3,135        6,208        6,315   

Data processing expense

     1,796        1,525        3,359        2,949   

Pennsylvania shares tax expense

     1,510        1,434        2,693        2,612   

Intangible amortization

     371        389        742        779   

Collection and repossession expense

     670        1,726        3,369        3,042   

Other professional fees and services

     940        1,099        2,139        2,224   

FDIC insurance

     1,262        1,248        2,499        3,083   

Loss on sale or write-down of assets

     500        4,214        3,789        4,515   

Other operating expenses

     6,109        5,889        12,974        11,709   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     41,848        45,700        88,600        87,129   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Income Taxes

     16,869        9,137        31,880        16,088   

Income tax provision

     4,548        1,718        8,508        3,423   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 12,321      $ 7,419      $ 23,372      $ 12,665   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average Shares Outstanding

     104,894,261        104,686,072        104,852,494        104,652,472   

Average Shares Outstanding Assuming Dilution

     104,901,239        104,686,072        104,855,543        104,653,604   

Per Share Data:

        

Basic Earnings per Share

   $ 0.12      $ 0.07      $ 0.22      $ 0.12   

Diluted Earnings per Share

   $ 0.12      $ 0.07      $ 0.22      $ 0.12   

Cash Dividends Declared per Common Share

   $ 0.05      $ 0.03      $ 0.08      $ 0.06   

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

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 

     For the Three-Months
Ended June 30,
    For the Six-Months
Ended June 30,
 
     2012     2011     2012      2011  
     (dollars in thousands)  

Net Income

   $ 12,321      $ 7,419      $ 23,372       $ 12,665   

Other comprehensive (loss) income, before tax (benefit) expense:

         

Unrealized holding gains on securities arising during the period

     998        9,125        1,097         7,509   

Non-credit related (losses) gains on securities not expected to be sold

     (1,323     448        175         2,317   

Less: reclassification adjustment for (gains) losses on securities included in net income

     0        (1,608     0         (2,185
  

 

 

   

 

 

   

 

 

    

 

 

 

Total other comprehensive (loss) income, before tax (benefit) expense

     (325     7,965        1,272         7,641   

Income tax (benefit) expense related to items of other comprehensive (loss) income

     (119     2,787        439         2,674   
  

 

 

   

 

 

   

 

 

    

 

 

 

Comprehensive Income

   $ 12,115      $ 12,597      $ 24,205       $ 17,632   
  

 

 

   

 

 

   

 

 

    

 

 

 

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

 

5


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

 

    Shares
Outstanding
    Common
Stock
    Additional
Paid-in-

Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss),
net
    Treasury
Stock
    Unearned
ESOP
Shares
    Total
Shareholders’
Equity
 
    (dollars in thousands, except share data)  

Balance at December 31, 2011

    104,916,994      $ 105,563      $ 365,868      $ 294,056      $ 2,001      $ (7,345   $ (1,600   $ 758,543   

Net income

          23,372              23,372   

Other comprehensive income

            833            833   

Cash dividends declared ($0.08 per share)

          (8,402           (8,402

Net decrease in unearned ESOP shares

                1,000        1,000   

ESOP market value adjustment ($477, net of $167 tax benefit)

        (310             (310

Discount on dividend reinvestment plan purchases

        (42             (42

Tax benefit of stock options exercised

        1                1   

Treasury stock acquired

    (469,700             (3,045       (3,045

Treasury stock reissued

    57,552          0        (296       650          354   

Restricted stock

    224,000          24        (1,264       1,426          186   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

    104,728,846      $ 105,563      $ 365,541      $ 307,466      $ 2,834      $ (8,314   $ (600   $ 772,490   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Shares
Outstanding
    Common
Stock
    Additional
Paid-in-
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss),
net
    Treasury
Stock
    Unearned
ESOP
Shares
    Total
Shareholders’
Equity
 
    (dollars in thousands, except share data)  

Balance at December 31, 2010

    104,846,194      $ 105,515      $ 366,488      $ 291,492      $ (2,458   $ (7,660   $ (3,600   $ 749,777   

Net income

          12,665              12,665   

Other comprehensive income

            4,967            4,967   

Cash dividends declared ($0.06 per share)

          (6,278           (6,278

Net decrease in unearned ESOP shares

                1,000        1,000   

ESOP market value adjustment ($472, net of $165 tax benefit)

        (307             (307

Discount on dividend reinvestment plan purchases

        (32             (32

Tax benefit of stock options exercised

        6                6   

Treasury stock acquired

    (1,336             (9       (9

Treasury stock reissued

    13,760          0        (83       155          72   

Restricted stock

    25,000        25        (10     0          56          71   

Common stock issuance

    23,376        23        121            0          144   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011

    104,906,994      $ 105,563      $ 366,266      $ 297,796      $ 2,509      $ (7,458   $ (2,600   $ 762,076   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

     For the Six-Months Ended
June 30,
 
     2012     2011  
     (dollars in thousands)  

Operating Activities

    

Net income

   $ 23,372      $ 12,665   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for credit losses

     8,084        22,929   

Deferred tax expense

     1,934        211   

Depreciation and amortization

     3,800        4,827   

Net (gains) losses on securities and other assets

     (522     1,384   

Net amortization of premiums and discounts on securities

     717        460   

Net accretion of premiums and discounts on long-term debt

     (56     (69

Income from increase in cash surrender value of bank owned life insurance

     (2,904     (2,747

Decrease in interest receivable

     1,031        1,085   

Decrease in interest payable

     (951     (558

Increase (decrease) in income taxes payable

     7,042        (894

Other-net

     (3,945     (122
  

 

 

   

 

 

 

Net cash provided by operating activities

     37,602        39,171   

Investing Activities

    

Transactions with securities available for sale:

    

Proceeds from sales

     0        69,926   

Proceeds from maturities and redemptions

     276,167        229,515   

Purchases

     (292,056     (331,702

Proceeds from the redemption of FHLB stock

     3,880        4,764   

Proceeds from bank owned life insurance

     1,408        88   

Proceeds from sale of loans

     15,981        4,402   

Proceeds from sales of other assets

     10,971        5,513   

Net (increase) decrease in loans

     (125,567     181,216   

Purchases of premises and equipment

     (4,022     (4,230
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (113,238     159,492   

Financing Activities

    

Net decrease in federal funds purchased

     (26,300     (12,800

Net increase (decrease) in other short-term borrowings

     187,787        (13,126

Net decrease in deposits

     (42,692     (81,657

Repayments of other long-term debt

     (25,238     (24,328

Proceeds from issuance of common stock

     0        144   

Discount on dividend reinvestment plan purchases

     (42     (32

Dividends paid

     (8,402     (6,278

Proceeds from reissuance of treasury stock

     354        72   

Purchase of treasury stock

     (1,812     (9

Stock option tax benefit

     1        0   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     83,656        (138,014
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     8,020        60,649   

Cash and cash equivalents at January 1

     78,478        69,858   
  

 

 

   

 

 

 

Cash and cash equivalents at June 30

   $ 86,498      $ 130,507   
  

 

 

   

 

 

 

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

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 Basis of Presentation

The accounting and reporting policies of First Commonwealth Financial Corporation and its subsidiaries (“First Commonwealth” or “Company”) conform with generally accepted accounting principles in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP 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 condensed consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation 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 six-months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the full year of 2012. These interim financial statements should be read in conjunction with First Commonwealth’s 2011 Annual Report on Form 10-K which is available on First Commonwealth’s website at http://www.fcbanking.com.

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold and interest-bearing bank deposits. Generally, federal funds are sold for one-day periods.

Note 2 Supplemental Comprehensive Income Disclosures

The following table identifies the related tax effects allocated to each component of other comprehensive income (“OCI”) in the Condensed Consolidated Statements of Comprehensive Income:

 

    For the Six-Months Ended June 30,  
    2012     2011  
    Pretax
Amount
    Tax
(Expense)
Benefit
    Net of
Tax
Amount
    Pretax
Amount
    Tax
(Expense)
Benefit
    Net of
Tax
Amount
 
    (dollars in thousands)  

Unrealized gains (losses) on securities:

 

Unrealized holding gains (losses) arising during the period

  $ 1,097      $ (378   $ 719      $ 7,509      $ (2,628   $ 4,881   

Non-credit related gains on securities not expected to be sold

    175        (61     114        2,317        (811     1,506   

Reclassification adjustment for (gains) losses on securities included in net income

    0        0        0        (2,185     765        (1,420
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income

  $ 1,272      $ (439   $ 833      $ 7,641      $ (2,674   $ 4,967   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    For the Three-Months Ended June 30,  
    2012     2011  
    Pretax
Amount
    Tax
(Expense)
Benefit
    Net of
Tax
Amount
    Pretax
Amount
    Tax
(Expense)
Benefit
    Net of
Tax
Amount
 
    (dollars in thousands)  

Unrealized gains on securities:

           

Unrealized holding gains on securities arising during the period

  $ 998      $ (344   $ 654      $ 9,125      $ (3,193   $ 5,932   

Non-credit related (losses) gains on securities not expected to be sold

    (1,323     463        (860     448        (157     291   

Reclassification adjustment for (gains) losses on securities included in net income

    0        0        0        (1,608     563        (1,045
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income

  $ (325   $ 119      $ (206   $ 7,965      $ (2,787   $ 5,178   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 3 Supplemental Cash Flow Disclosures

The following table presents information related to cash paid during the period for interest and income taxes as well as detail on non-cash investing and financing activities for the six-months ended June 30:

 

     2012      2011  
     (dollars in thousands)  

Cash paid during the period for:

     

Interest

   $ 17,278       $ 23,377   

Income taxes

     5,700         3,900   

Non-cash investing and financing activities:

     

ESOP loan reductions

   $ 1,000       $ 1,000   

Loans transferred to other real estate owned and repossessed assets

     3,227         20,640   

Other real estate owned sold and settled out of period

     80         0   

Loans transferred from held to maturity to available for sale

     0         823   

Gross increase in market value adjustment to securities available for sale

     1,254         7,631   

Unsettled treasury stock repurchases

     1,233         0   

Note 4 Earnings per Share

The following table summarizes the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computations:

 

    For the Three-Months Ended
June 30,
    For the Six-Months Ended
June 30,
 
    2012     2011     2012     2011  

Weighted average common shares issued

    105,563,455        105,558,574        105,563,455        105,536,947   

Average treasury shares

    (410,247     (656,461     (476,286     (660,206

Averaged unearned ESOP shares

    (50,170     (181,835     (67,580     (198,285

Average unearned nonvested shares

    (208,777     (34,206     (167,095     (25,984
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares and common stock equivalents used to calculate basic earnings per share

    104,894,261        104,686,072        104,852,494        104,652,472   

Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share

    6,978        0        3,049        0   

Additional common stock equivalents (stock options) used to calculate diluted earnings per share

    0        0        0        1,132   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares and common stock equivalents used to calculate diluted earnings per share

    104,901,239        104,686,072        104,855,543        104,653,604   
 

 

 

   

 

 

   

 

 

   

 

 

 

The following table shows the number of shares and the price per share related to common stock equivalents that were not included in the computation of diluted earnings per share for the six-months ended June 30, because to do so would have been antidilutive.

 

     2012      2011  
            Price Range             Price Range  
     Shares      From      To      Shares      From      To  

Stock Options

     329,866       $ 6.36       $ 14.55         546,270       $ 6.36       $ 14.55   

Restricted Stock

     96,113         5.96         6.82         20,725         5.70         6.82   

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 5 Variable Interest Entities

As defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810-10, a Variable Interest Entity (“VIE”) is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. Under ASC 810-10, an entity that holds a variable interest in a VIE is required to consolidate the VIE if the entity is deemed to be the primary beneficiary, which generally means it 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.

First Commonwealth’s VIEs are evaluated under the guidance included in FASB Accounting Standards Update (“ASU”) 2009-17. These VIEs include qualified affordable housing projects that First Commonwealth has invested in as part of its community reinvestment initiatives. We periodically assess whether or not our variable interests in the VIE, based on qualitative analysis, provide us with a controlling interest in the VIE. The analysis includes an assessment of the characteristics of the VIE. We do not have a controlling financial interest in the VIE, which would require consolidation of the VIE, as we do not have the following characteristics: (1) the power to direct the activities that most significantly impact the VIE’s economic performance; and (2) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

First Commonwealth’s maximum potential exposure is equal to its carrying value and is summarized in the table below:

 

     June 30,      December 31,  
     2012      2011  
     (dollars in thousands)  

Low Income Housing Limited Partnership Investments

   $ 510       $ 667   

Note 6 Commitments and Contingent Liabilities

Commitments and letters of credit

Standby letters of credit and commercial 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,      December 31,  
     2012      2011  
     (dollars in thousands)  

Financial instruments whose contract amounts represent credit risk:

     

Commitments to extend credit

   $ 1,480,490       $ 1,495,009   

Financial standby letters of credit

     48,641         53,689   

Performance standby letters of credit

     66,197         76,371   

Commercial letters of credit

     1,048         1,297   

The current notional amounts outstanding as of June 30, 2012 include financial standby letters of credit of $0.1 million, performance standby letters of credit of $5.8 million, and commercial letters of credit $0.3 million issued

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 6 Commitments and Contingent Liabilities (Continued)

Commitments and letters of credit (Continued)

 

during the first six months of 2012. A liability of $0.1 million has been recorded as of June 30, 2012 and December 31, 2011, which represents the estimated fair value of letters of credit issued. The fair value of letters of credit is estimated based on the unrecognized portion of fees received at the time the commitment was issued.

Unused commitments and letters of credit provide exposure to future credit loss in the event of nonperformance by the borrower or guaranteed parties. Management’s evaluation of the credit risk in these commitments resulted in the recording of a liability of $2.1 million as of June 30, 2012 and $1.5 million as of December 31, 2011. The credit risk evaluation incorporated probability of default, loss given default and estimated utilization for the next twelve months for each loan category and the letters of credit.

Legal proceedings

McGrogan v. First Commonwealth Bank is a class action that was filed on January 12, 2009, in the Court of Common Pleas of Allegheny County, Pennsylvania. The action alleges that First Commonwealth Bank (the “Bank”) promised class members a minimum interest rate of 8% on its IRA Market Rate Savings Account for as long as the class members kept their money on deposit in the IRA account. The class asserts that the Bank committed fraud, breached its modified contract with the class members, and violated the Pennsylvania Unfair Trade Practice and Consumer Protection Law when it resigned as custodian of the IRA Market Rate Savings Accounts in 2008 and offered the class members a roll-over IRA account with a 3.5% interest rate. At that time, there were 237 account holders with an average age of 64, and the aggregate balances in the IRA Market Rate Savings accounts totaled approximately $11.5 million. Plaintiffs seek monetary damages for the alleged breach of contract, punitive damages for the alleged fraud and Unfair Trade Practice and Consumer Protection Law violations and attorney’s fees. On July 27, 2011, the court granted class certification as to the breach of modified contract claim and denied class certification as to the fraud and Pennsylvania Unfair Trade Practice and Consumer Protection Law claims. The breach of contract claim is predicated upon a letter sent to customers in 1998 which reversed an earlier decision by the Bank to reduce the rate paid on the accounts. The letter stated, in relevant part, “This letter will serve as notification that a decision has been made to re-establish the rate on your account to eight percent (8%). This rate will be retroactive to your most recent maturity date and will continue going forward on deposits presently in the account and on annual additions.” In granting class certification, the court found that the letter could constitute a modification of the original IRA contract that would obligate the Bank to pay a minimum rate of 8% until the accounts are closed. Plaintiffs and the Bank have filed motions for summary judgment. In support of its motion, the Bank has asserted that the 1998 letter did not alter the Bank’s right to resign as custodian and close the accounts, which the Bank exercised in 2008. Oral argument on the motions for summary judgment was held on April 4, 2012, and a decision is currently pending. The amount of the Bank’s liability, if any, will depend upon information which is not presently known to the Bank, including the court’s interpretation of the 1998 letter, each class member’s life expectancy and pace of distributions from the IRA account, and the extent to which damages were or could have been mitigated through alternative investments. Accordingly, the Company is unable to estimate the amount or range of a reasonably possible loss.

Other matters

There are no other material legal proceedings to which First Commonwealth or its subsidiaries are a party, or of which 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 or its subsidiaries.

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 7 Investment Securities

Below is an analysis of the amortized cost and estimated fair values of securities available for sale at:

 

    June 30, 2012     December 31, 2011  
    Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Estimated
Fair Value
    Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Estimated
Fair Value
 
                      (dollars in thousands)                    

Obligations of U.S. Government Agencies:

               

Mortgage-Backed Securities – Residential

  $ 30,541      $ 4,079      $ 0      $ 34,620      $ 32,139      $ 4,061      $ (6   $ 36,194   

Obligations of U.S. Government- Sponsored Enterprises:

               

Mortgage-Backed Securities – Residential

    815,982        29,853        (96     845,739        771,196        29,835        0        801,031   

Mortgage-Backed Securities – Commercial

    175        2        0        177        193        1        (1     193   

Other Government – Sponsored Enterprises

    241,697        870        (1     242,566        267,807        973        (132     268,648   

Obligations of States and Political Subdivisions

    443        6        0        449        444        15        0        459   

Corporate Securities

    11,796        274        (71     11,999        11,811        162        (562     11,411   

Pooled Trust Preferred Collateralized Debt Obligations

    52,889        153        (31,250     21,792        54,762        3        (31,785     22,980   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Debt Securities

    1,153,523        35,237        (31,418     1,157,342        1,138,352        35,050        (32,486     1,140,916   

Equities

    1,860        0        0        1,860        1,860        0        0        1,860   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Securities Available for Sale

  $ 1,155,383      $ 35,237      $ (31,418   $ 1,159,202      $ 1,140,212      $ 35,050      $ (32,486   $ 1,142,776   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The amortized cost and estimated fair value of debt securities available for sale at June 30, 2012, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or repay obligations with or without call or prepayment penalties.

 

     Amortized
Cost
     Estimated
Fair Value
 
     (dollars in thousands)  

Due within 1 year

   $ 7,363       $ 7,373   

Due after 1 but within 5 years

     234,776         235,641   

Due after 5 but within 10 years

     0         0   

Due after 10 years

     64,686         33,792   
  

 

 

    

 

 

 
     306,825         276,806   

Mortgage-Backed Securities (a)

     846,698         880,536   
  

 

 

    

 

 

 

Total Debt Securities

   $ 1,153,523       $ 1,157,342   
  

 

 

    

 

 

 

 

(a) Mortgage Backed Securities include an amortized cost of $30.5 million and a fair value of $34.6 million for Obligations of U.S. Government agencies issued by Ginnie Mae and Obligations of U.S. Government-sponsored enterprises issued by Fannie Mae and Freddie Mac which had an amortized cost of $816.2 million and a fair value of $845.9 million.

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 7 Investment Securities (Continued)

 

Proceeds from sale, gross gains (losses) realized on sales, maturities and other-than-temporary impairment charges related to securities available for sale were as follows for the six-months ended June 30:

 

     2012      2011  
     (dollars in thousands)  

Proceeds from sale

   $ 0       $ 69,926   
  

 

 

    

 

 

 

Gross gains (losses) realized:

     

Sales Transactions:

     

Gross gains

   $ 0       $ 2,368   

Gross losses

     0         (258
  

 

 

    

 

 

 
     0         2,110   

Maturities and impairment

     

Gross gains

     0         75   

Gross losses

     0         0   

Other-than-temporary impairment

     0         0   
  

 

 

    

 

 

 
     0         75   
  

 

 

    

 

 

 

Net gains and impairment

   $ 0       $ 2,185   
  

 

 

    

 

 

 

Securities available for sale with a fair value of $622.8 million and $668.8 million were pledged as of June 30, 2012 and December 31, 2011, respectively, to secure public deposits and for other purposes required or permitted by law.

There were no held-to-maturity debt securities as of June 30, 2012 and December 31, 2011. For the six-months ended June 30, 2012 and 2011, there were no gains or losses for debt securities held-to-maturity.

Note 8 Other Investments

As a member of the Federal Home Loan Bank (“FHLB”), First Commonwealth is required to purchase and hold stock in the FHLB to satisfy membership and borrowing requirements. This stock is restricted in that it can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be at par. As a result of these restrictions, FHLB stock is unlike other investment securities insofar as there is no trading market for FHLB stock and the transfer price is determined by FHLB membership rules and not by market participants. As of June 30, 2012 and December 31, 2011, our FHLB stock totaled $35.9 million and $39.8 million, respectively and is included in “Other investments” on the Condensed Consolidated Statements of Financial Condition.

During 2012 and 2011, the FHLB repurchased excess stock from its members by repurchasing the lessor of 5% of the members’ total capital stock outstanding or its total excess capital stock. As a result, during the six-months ended June 30, 2012 and 2011, stock repurchases occurred in the amounts of $3.9 million and $2.4 million, respectively. The FHLB repurchased stock and paid dividends in both the first and second quarters of 2012, however, decisions regarding any future repurchase of excess capital stock and dividend payments will be made by the FHLB on a quarterly basis. Management reviewed the FHLB’s Form 10-Q for the period ended March 31, 2012 filed with the SEC on May 9, 2012.

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 8 Other Investments (Continued)

 

FHLB stock is held as a long-term investment and its value is determined based on the ultimate recoverability of the par value. First Commonwealth evaluates impairment quarterly. The decision of whether impairment exists is a matter of judgment that reflects our view of the FHLB’s long-term performance, which includes factors such as the following:

 

 

its operating performance;

 

 

the severity and duration of declines in the fair value of its net assets related to its capital stock amount;

 

 

its commitment to make payments required by law or regulation and the level of such payments in relation to its operating performance;

 

 

the impact of legislative and regulatory changes on the FHLB, and accordingly, on the members of FHLB; and

 

 

its liquidity and funding position.

After evaluating all of these considerations, First Commonwealth concluded that the par value of its investment in FHLB stock will be recovered. Accordingly, no impairment charge was recorded on these securities for the six-months ended June 30, 2012. Our evaluation of the factors described above in future periods could result in the recognition of impairment charges on FHLB stock.

Note 9 Impairment of Investment Securities

As required by FASB ASC Topic 320, “Investments – Debt and Equity Securities,” credit related other-than-temporary impairment on debt securities is recognized in earnings while non-credit related other-than-temporary impairment on debt securities not expected to be sold is recognized in OCI. During the six-months ended June 30, 2012 and 2011, no other-than-temporary impairment charges were recognized and $0.2 and $2.3 million, respectively, in non-credit related gains on our trust preferred collateralized debt obligations that were determined to be impaired in previous periods was recorded in OCI. All of the securities for which other-than-temporary impairment was recorded were classified as available for sale securities.

First Commonwealth utilizes the specific identification method to determine the net gain or loss on debt securities and the average cost method to determine the net gain or loss on equity securities.

In the Condensed Consolidated Statements of Income, the “Changes in fair value on impaired securities” line represents the change in fair value of securities impaired in the current or previous periods. The change in fair value includes both non-credit and credit related gains or losses. Credit related losses occur when the entire amortized cost of the security will not be recovered. The “Non-credit related losses (gains) on securities not expected to be sold (recognized in other comprehensive income)” line represents the gains and losses on the securities resulting from factors other than credit. The non-credit related gain or loss is disclosed in the Condensed Consolidated Statements of Income and recognized through other comprehensive income. The “Net impairment losses” line represents the credit related losses recognized in total noninterest income for the related period.

We review our investment portfolio on a quarterly basis for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 9 Impairment of Investment Securities (Continued)

 

of the issuer and whether we are more likely than not to sell the security. We evaluate whether we are more likely than not to sell debt securities based upon our investment strategy for the particular type of security and our cash flow needs, liquidity position, capital adequacy, tax position and interest rate risk position. In addition, the risk of future other-than-temporary impairment may be influenced by additional bank failures, weakness in the U.S. economy, changes in real estate values and additional interest deferrals in our pooled trust preferred collateralized debt obligations. Our pooled trust preferred collateralized debt obligations are beneficial interests in securitized financial assets within the scope of FASB ASC Topic 325, “Investments – Other,” and are therefore evaluated for other-than-temporary impairment using management’s best estimate of future cash flows. If these estimated cash flows indicate that it is probable that an adverse change in cash flows has occurred, then other-than-temporary impairment would be recognized in accordance with FASB ASC Topic 320. There is a risk that First Commonwealth will record other-than-temporary impairment charges in the future. See Note 12, “Fair Values of Assets and Liabilities,” for additional information.

The following table presents the gross unrealized losses and estimated fair values at June 30, 2012 by investment category and time frame for which securities have been in a continuous unrealized loss position:

 

    Less Than 12 Months     12 Months or More     Total  
     Estimated
Fair Value
    Gross
Unrealized
Losses
    Estimated
Fair Value
    Gross
Unrealized
Losses
    Estimated
Fair Value
    Gross
Unrealized
Losses
 
    (dollars in thousands)  

Obligations of U.S. Government Agencies:

           

Mortgage-Backed Securities – Residential

  $ 0      $ 0      $ 15      $ 0  (a)    $ 15      $ 0   

Obligations of U.S. Government – Sponsored Enterprises:

           

Mortgage-Backed Securities – Residential

    24,232        (96     0        0        24,232        (96

Other Government-Sponsored Enterprises

    2,999        (1     0        0        2,999        (1

Obligations of States and Political Subdivisions

    360        0  (a)      0        0        360        0   

Corporate Securities

    8,079        (71     0        0        8,079        (71

Pooled Trust Preferred Collateralized Debt Obligations

    0        0        21,437        (31,250     21,437        (31,250
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Debt Securities

    35,670        (168     21,452        (31,250     57,122        (31,418

Equities

    0        0        0        0        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Securities Available for Sale

  $ 35,670      $ (168   $ 21,452      $ (31,250   $ 57,122      $ (31,418
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Gross unrealized losses related to these types of securities are less than $1 thousand.

At June 30, 2012, pooled trust preferred collateralized debt obligations accounted for almost all of the unrealized losses, while fixed income securities issued by U.S. Government agencies and U.S. Government-sponsored enterprises and corporate fixed income comprised less than one percent of total unrealized losses. There were no equity securities in an unrealized loss position at June 30, 2012.

As of June 30, 2012, our corporate securities had an amortized cost and an estimated fair value of $11.8 million and $12.0 million, respectively, and were comprised of single issue trust preferred securities issued primarily by money center and large regional banks. As of December 31, 2011, the same portion of the portfolio had an amortized cost of $11.8 million and an estimated fair value of $11.4 million. Included in the corporate securities

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 9 Impairment of Investment Securities (Continued)

 

portfolio are investments which had a gross unrealized loss of $71 thousand as of June 30, 2012 and $0.6 million as of December 31, 2011. After a review of each of the issuer’s asset quality, earnings trend and capital position, it was determined that none of the issues in an unrealized loss position were other-than-temporarily impaired. Additionally, all interest payments on these securities are being made as contractually required.

The following table presents the gross unrealized losses and estimated fair values at December 31, 2011 by investment category and time frame for which securities have been in a continuous unrealized loss position:

 

    Less Than 12 Months     12 Months or More     Total  
    Estimated
Fair Value
    Gross
Unrealized
Losses
    Estimated
Fair Value
    Gross
Unrealized
Losses
    Estimated
Fair Value
    Gross
Unrealized
Losses
 
    (dollars in thousands)  

Obligations of U.S. Government Agencies:

           

Mortgage-Backed Securities – Residential

  $ 1,086      $ (6   $ 16      $ (a)    $ 1,102      $ (6

Obligations of U.S. Government- Sponsored Enterprises:

           

Mortgage-Backed Securities – Residential

  $ 25      $ (a)      0      $ 0      $ 25      $ 0   

Mortgage-Backed Securities – Commercial

    151        (1     0        0        151        (1

Other Government-Sponsored Enterprises

    55,969        (132     0        0        55,969        (132

Corporate Securities

    4,536        (562     0        0        4,536        (562

Pooled Trust Preferred Collateralized Debt Obligations

    0        0        22,927        (31,785     22,927        (31,785
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Securities Available for Sale

  $ 61,767      $ (701   $ 22,943      $ (31,785   $ 84,710      $ (32,486
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Gross unrealized losses related to these types of securities are less than $1 thousand.

As of June 30, 2012, the book value of our pooled trust preferred collateralized debt obligations totaled $52.9 million with an estimated fair value of $21.8 million, which includes securities comprised of 348 banks and other financial institutions. Two of our pooled securities are senior tranches and the remainders are mezzanine tranches, three of which have no senior class remaining in the issue. Two of the pooled issues, representing $3.5 million of the $52.9 million book value, remain above investment grade. At the time of initial issue, the subordinated tranches ranged in size from approximately 7% to 35% of the total principal amount of the respective securities and no more than 5% of any pooled security consisted of a security issued by any one institution. As of June 30, 2012, after taking into account management’s best estimates of future interest deferrals and defaults, seven of our securities had no excess subordination in the tranches we own and seven of our securities had excess subordination which ranged from 8% to 282% of the current performing collateral.

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 9 Impairment of Investment Securities (Continued)

 

The following table provides information related to our pooled trust preferred collateralized debt obligations as of June 30, 2012:

 

Deal

   Class    Book
Value
     Fair
Value
     Unrealized
Gain
(Loss)
    Moody’s/
Fitch
Ratings
   Number
of
Banks
     Deferrals
and
Defaults
as a % of
Current
Collateral
    Excess
Subordination
as a % of
Current
Performing
Collateral
 
(dollars in thousands)  

Pre TSL I

   Senior    $ 1,581       $ 1,545       $ (36   Aa3/BBB      20         39.50     217.29

Pre TSL IV

   Mezzanine      1,830         622         (1,208   Caa2/CCC      6         27.07        96.48   

Pre TSL V

   Mezzanine      51         54         3      C/D      3         100.00        0.00   

Pre TSL VI

   Mezzanine      152         302         150      Ca/D      5         12.27        205.63   

Pre TSL VII

   Mezzanine      4,062         2,939         (1,123   Ca/C      17         52.13        0.00   

Pre TSL VIII

   Mezzanine      1,735         981         (754   C/C      35         45.91        0.00   

Pre TSL IX

   Mezzanine      2,250         766         (1,484   Ca/C      47         25.88        8.19   

Pre TSL X

   Mezzanine      1,399         1,026         (373   C/C      51         38.24        0.00   

Pre TSL XII

   Mezzanine      5,486         2,698         (2,788   Ca/C      74         33.05        0.00   

Pre TSL XIII

   Mezzanine      12,258         3,820         (8,438   Ca/C      63         39.60        0.00   

Pre TSL XIV

   Mezzanine      12,942         4,158         (8,784   Ca/C      63         38.42        31.74   

MMCap I

   Senior      1,898         1,807         (91   A3/BBB      20         38.89        282.43   

MMCap I

   Mezzanine      844         448         (396   Ca/C      20         38.89        11.77   

MM Comm IX

   Mezzanine      6,401         626         (5,775   Ca/D      31         38.14        0.00   
     

 

 

    

 

 

    

 

 

           

Total

      $ 52,889       $ 21,792       $ (31,097          
     

 

 

    

 

 

    

 

 

           

Lack of liquidity in the market for trust preferred collateralized debt obligations, credit rating downgrades and market uncertainties related to the financial industry are factors contributing to the impairment on these securities.

On a quarterly basis we evaluate our debt securities for other-than-temporary impairment. During the six-months ended June 30, 2012 and 2011, there were no credit related other-than-temporary impairment charges recognized on our pooled trust preferred collateralized debt obligations. When evaluating these investments we determine a credit related portion and a non-credit related portion of other-than-temporary impairment. The credit related portion is recognized in earnings and represents the difference between book value and the present value of future cash flows. The non-credit related portion is recognized in OCI and represents the difference between the fair value of the security and the amount of credit related impairment. A discounted cash flow analysis provides the best estimate of credit related other-than-temporary impairment for these securities.

Additional information related to the discounted cash flow analysis follows:

Our pooled trust preferred collateralized debt obligations are measured for other-than-temporary impairment within the scope of FASB ASC Topic 325 by determining whether it is probable that an adverse change in estimated cash flows has occurred. Determining whether there has been an adverse change in estimated cash flows from the cash flows previously projected involves comparing the present value of remaining cash flows previously projected against the present value of the cash flows estimated at June 30, 2012. We consider the discounted cash flow analysis to be our primary evidence when determining whether credit related other-than-temporary impairment exists.

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 9 Impairment of Investment Securities (Continued)

 

Results of a discounted cash flow test are significantly affected by other variables such as the estimate of future cash flows, credit worthiness of the underlying banks and determination of probability of default of the underlying collateral. The following provides additional information for each of these variables:

 

 

Estimate of Future Cash Flows – Cash flows are constructed in an INTEX cash flow model which includes each deal’s structural features. For collateral issued by financial institutions with over $15 billion in asset size, we consider the alternative cost of funding and if that rate is less than the current rate being paid, we incorporate a prepayment in our estimate of future cash flows. The prepayment rates used are 20% in years 2 and 3 and a 2% prepayment rate thereafter. The modeled cash flows are then used to estimate if all the scheduled principal and interest payments of our investments will be returned.

 

 

Credit Analysis – A quarterly credit evaluation is performed for each of the 348 banks comprising the collateral across the various pooled trust preferred securities. Our credit evaluation considers all evidence available to us and includes the nature of the issuer’s business, its years of operating history, corporate structure, loan composition, loan concentrations, deposit mix, asset growth rates, geographic footprint and local economic environment. Our analysis focuses on profitability, return on assets, shareholders’ equity, net interest margin, credit quality ratios, operating efficiency, capital adequacy and liquidity.

 

 

Probability of Default – A probability of default is determined for each bank and is used to calculate the expected impact of future deferrals and defaults on our expected cash flows. Each bank in the collateral pool is assigned a probability of default for each year until maturity. Currently, any bank that is in default is assigned a 100% probability of default and a 0% projected recovery rate. All other banks in the pool are assigned a probability of default based on their unique credit characteristics and market indicators with a 10% projected recovery rate. For the majority of banks currently in deferral we assume the bank continues to defer and will eventually default and, therefore, a 100% probability of default is assigned. However, for some deferring collateral there is the possibility that they become current on interest or principal payments at some point in the future and in those cases a probability that the deferral will ultimately cure is assigned. The probability of default is updated quarterly. As of June 30, 2012, default probabilities for performing collateral ranged from 0.33% to 75%.

Our credit evaluation provides a basis for determining deferral and default probabilities for each underlying piece of collateral. Using the results of the credit evaluation, the next step of the process is to look at pricing of senior debt or credit default swaps for the issuer (or where such information is unavailable, for companies having similar credit profiles as the issuer). The pricing of these market indicators provides the information necessary to determine appropriate default probabilities for each bank.

In addition to the above factors, our evaluation of impairment also includes a stress test analysis which provides an estimate of excess subordination for each tranche. We stress the cash flows of each pool by increasing current default assumptions to the level of defaults which results in an adverse change in estimated cash flows. This stressed breakpoint is then used to calculate excess subordination levels for each pooled trust preferred security. The results of the stress test allows management to identify those pools that are at a greater risk for a future break in cash flows so that we can monitor banks in those pools more closely for potential deterioration of credit quality.

Our cash flow analysis as of June 30, 2012, indicates that no credit related other-than-temporary impairment has occurred on our pooled trust preferred securities during the six-months ended June 30, 2012. Based upon the analysis performed by management, it is probable that seven of our pooled trust preferred securities will experience principal and interest shortfalls and therefore appropriate other-than-temporary charges were recorded

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 9 Impairment of Investment Securities (Continued)

 

in prior periods. These securities are identified in the table on page 17 with 0% “Excess Subordination as a Percentage of Current Performing Collateral.” For the remaining securities listed in that table, our analysis as of June 30, 2012 indicates it is probable that we will collect all contractual principal and interest payments.

During 2008, 2009 and 2010, other-than-temporary impairment charges were recognized on all of our pooled trust preferred securities, except for PreTSL I, PreTSL IV and MMCap I-Senior. Our cash flow analysis as of June 30, 2012, for all of these impaired securities indicates that it is now probable we will collect principal and interest in excess of what was estimated at the time other-than-temporary impairment charges were recorded. This change can be attributed to improvement in the underlying collateral for these securities and has resulted in our current book value being below the present value of estimated future principal and interest payments. The excess for each bond of the present value of future cash flows over our current book value ranges from 29% to 520% and will be recognized as an adjustment to yield over the remaining life of these securities. During the three- and six-months ended June 30, 2012, $0.3 million and $0.5 million, respectively, of the excess was recognized as an adjustment to yield on these securities.

The following provides a cumulative roll forward of credit losses recognized in earnings for debt securities held and not intended to be sold:

 

     For the Three-Months
Ended June 30,
     For the Six-Months
Ended June 30,
 
     2012     2011      2012     2011  
     (dollars in thousands)  

Balance, beginning (a)

   $ 44,501      $ 44,850       $ 44,736      $ 44,850   

Credit losses on debt securities for which other-than-temporary impairment was not previously recognized

     0        0         0        0   

Additional credit losses on debt securities for which other-than-temporary impairment was previously recognized

     0        0         0        0   

Increases in cash flows expected to be collected, recognized over the remaining life of the security (b)

     (271     0         (506     0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Balance, ending

   $ 44,230      $ 44,850       $ 44,230      $ 44,850   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(a) The beginning balance represents credit related losses included in other-than-temporary impairment charges recognized on debt securities in prior periods.
(b) Represents the increase in cash flows recognized in interest income during the period.

In the second quarter of 2012 and 2011, no other-than-temporary impairment charges were recorded on equity securities. On a quarterly basis, management evaluates equity securities for other-than-temporary impairment by reviewing the severity and duration of decline in estimated fair value, research reports, analysts’ recommendations, credit rating changes, news stories, annual reports, regulatory filings, impact of interest rate changes and other relevant information. As of June 30, 2012 and 2011, there are no equity securities in an unrealized loss position.

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 10 Loans and Allowance for Credit Losses

The following table provides outstanding balances related to each of our loan types:

 

     June 30,
2012
     December 31,
2011
 
     (dollars in thousands)  

Commercial, financial, agricultural and other

   $ 1,059,675       $ 996,739   

Real estate construction

     77,442         76,564   

Residential real estate

     1,213,610         1,137,059   

Commercial real estate

     1,232,270         1,267,432   

Loans to individuals

     576,534         565,849   
  

 

 

    

 

 

 

Total loans and leases net of unearned income

   $ 4,159,531       $ 4,043,643   
  

 

 

    

 

 

 

During the six-months ended June 30, 2012, loans increased $115.9 million or 3% compared to balances outstanding at December 31, 2011. A majority of the loan growth was recognized in the residential real estate portfolio as a result of seasonal demand and an ongoing loan promotion. Increases in the commercial, financial, agricultural and other portfolio can be attributed primarily to growth in our syndication portfolio in Pennsylvania and contiguous states, while loans to individuals increased due to growth in home equity installment loans and indirect auto lending.

Credit Quality Information

As part of the on-going monitoring of credit quality within the loan portfolio, the following credit worthiness categories are used in grading our loans:

 

Pass    Acceptable levels of risk exist in the relationship. Includes all loans not adversely classified as OAEM, substandard or doubtful.
Other Assets Especially Mentioned (OAEM)
   Potential weaknesses that deserve management’s close attention. The potential weaknesses may result in deterioration of the repayment prospects or weaken the Bank’s credit position at some future date. The credit risk may be relatively minor, yet constitute an undesirable risk in light of the circumstances surrounding the specific credit. No loss of principal or interest is expected.
Substandard    Well-defined weakness or a weakness that jeopardizes the repayment of the debt. A loan may be classified as substandard as a result of deterioration of the borrower’s financial condition and repayment capacity. Loans for which repayment plans have not been met or collateral equity margins do not protect the Company may also be classified as substandard.
Doubtful    Loans with the characteristics of substandard loans with the added characteristic that collection or liquidation in full, on the basis of presently existing facts and conditions, is highly improbable.

The use of creditworthiness categories to grade loans permits management’s use of migration analysis to estimate a portion of credit risk. The Company’s internal creditworthiness grading system provides a measurement of credit risk based primarily on an evaluation of the borrower’s cash flow and collateral. Movements between these rating categories provides a predictive measure of credit losses and therefore assists in determining the appropriate level for the loan loss reserves. Category ratings are reviewed each quarter, at which time management analyzes the results, as well as other external statistics and factors related to loan performance. Loans that migrate towards higher risk rating levels generally have an increased risk of default, whereas, loans that migrate toward lower risk ratings generally will result in a lower risk factor being applied to those related loan balances.

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 10 Loans and Allowance for Credit Losses (Continued)

 

Credit Quality Information (Continued)

 

The following tables represent our credit risk profile by creditworthiness:

 

     June 30, 2012  
     Commercial,
financial,
agricultural
and other
     Real estate
construction
     Residential
real estate
     Commercial
real estate
     Loans to
individuals
     Total  
     (dollars in thousands)  

Pass

   $ 955,231       $ 50,028       $ 1,202,163       $ 1,103,062       $ 576,530       $ 3,887,014   

Non-Pass

                 

OAEM

     27,384         699         5,668         68,925         4         102,680   

Substandard

     77,060         21,004         5,779         60,283         0         164,126   

Doubtful

     0         5,711         0         0         0         5,711   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Pass

     104,444         27,414         11,447         129,208         4         272,517   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,059,675       $ 77,442       $ 1,213,610       $ 1,232,270       $ 576,534       $ 4,159,531   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     Commercial,
financial,
agricultural
and other
     Real estate
construction
     Residential
real estate
     Commercial
real estate
     Loans to
individuals
     Total  
     (dollars in thousands)  

Pass

   $ 904,057       $ 44,914       $ 1,126,143       $ 1,110,664       $ 565,842       $ 3,751,620   

Non-Pass

                 

OAEM

     27,627         4,238         5,484         61,855         7         99,211   

Substandard

     60,114         21,701         5,432         94,913         0         182,160   

Doubtful

     4,941         5,711         0         0         0         10,652   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Pass

     92,682         31,650         10,916         156,768         7         292,023   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 996,739       $ 76,564       $ 1,137,059       $ 1,267,432       $ 565,849       $ 4,043,643   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Portfolio Risks

Credit quality measures at June 30, 2012 compared to December 31, 2011 indicate a decrease in criticized loans, or loans designated OAEM, substandard or doubtful, of $19.5 million, or 7%, an increase in delinquency on accruing loans of $1.9 million, or 5%, and a $0.2 million increase in nonaccrual loans, excluding loans held-for-sale.

Charge-offs for the six-months ended June 30, 2012 totaled $8.7 million compared to $19.8 million for the six-months ended June 30, 2011. The most significant charge-off during the six-months ended June 30, 2012 was a $1.2 million charge taken on a $2.0 million commercial loan relationship. During the six-months ended June 30, 2011, the most significant charge-off totaled $3.1 million and related to a western Pennsylvania office complex. Other significant charge-offs totaled $7.7 million and related to five construction loan projects located in Florida, Nevada, Ohio and western and central Pennsylvania.

Criticized loans totaled $272.5 million at June 30, 2012 and represented 7% of the loan portfolio. This represents a $19.5 million decrease compared with the portfolio as of December 31, 2011. These loans have been evaluated when determining the appropriateness of the allowance for credit losses, which we believe is adequate at this time. However, changes in economic conditions, interest rates, borrower financial condition, delinquency trends or previously established fair values of collateral factors could significantly change those judgmental estimates.

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 10 Loans and Allowance for Credit Losses (Continued)

Portfolio Risks (Continued)

 

The credit quality of our loan portfolio represents significant risk to our earnings, capital, regulatory agency relationships and shareholder returns. First Commonwealth devotes a substantial amount of resources to managing this risk primarily through our credit administration department that develops and administers policies and procedures for underwriting, maintaining, monitoring and collecting activities. Credit administration is independent of lending departments and oversight is provided by the Credit Committee of the First Commonwealth Board of Directors.

Risk factors associated with commercial real estate and construction related loans are monitored closely since this is an area that represents a significant portion of the loan portfolio and has experienced the most stress during the economic downturn.

In addition, during the first six months of 2012, five relationships consisting of eight loans, were classified as troubled debt restructuring. These loans increased the nonperforming loan balance by $3.8 million with no increase in specific reserves.

Age Analysis of Past Due Loans by Segment

The following tables delineate the aging analysis of the recorded investments in past due loans as of June 30, 2012 and December 31, 2011. Also included in these tables are loans that are 90 days or more past due and still accruing because they are well-secured and in the process of collection.

 

    June 30, 2012  
    30 - 59
days
past due
    60 - 89
days
past
due
    90 days
and
greater
and still
accruing
    Nonaccrual     Total past
due and
nonaccrual
    Current     Total  
    (dollars in thousands)  

Commercial, financial, agricultural and other

  $ 9,148      $ 4,101      $ 3,604      $ 27,758      $ 44,611      $ 1,015,064      $ 1,059,675   

Real estate construction

    16        0        469        15,060        15,545        61,897        77,442   

Residential real estate

    6,555        1,852        4,961        3,923        17,291        1,196,319        1,213,610   

Commercial real estate

    1,497        431        305        31,951        34,184        1,198,086        1,232,270   

Loans to individuals

    2,384        875        1,248        0        4,507        572,027        576,534   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 19,600      $ 7,259      $ 10,587      $ 78,692      $ 116,138      $ 4,043,393      $ 4,159,531   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    December 31, 2011  
    30 - 59
days
past due
    60 - 89
days
past
due
    90 days
and
greater
and still
accruing
    Nonaccrual     Total past
due and
nonaccrual
    Current     Total  
    (dollars in thousands)  

Commercial, financial, agricultural and other

  $ 5,433      $ 824      $ 287      $ 33,459      $ 40,003      $ 956,736      $ 996,739   

Real estate construction

    0        180        0        14,911        15,091        61,473        76,564   

Residential real estate

    7,144        2,100        8,767        3,153        21,164        1,115,895        1,137,059   

Commercial real estate

    3,671        1,241        157        26,953        32,022        1,235,410        1,267,432   

Loans to individuals

    2,952        962        1,804        0        5,718        560,131        565,849   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 19,200      $ 5,307      $ 11,015      $ 78,476      $ 113,998      $ 3,929,645      $ 4,043,643   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 10 Loans and Allowance for Credit Losses (Continued)

Age Analysis of Past Due Loans by Segment (Continued)

 

The previous tables summarize nonaccrual loans by loan segment. The Company generally places loans on nonaccrual status when the full and timely collection of interest or principal becomes uncertain, when part of the principal balance has been charged off and no restructuring has occurred, or the loans reach a certain number of days past due. Generally, loans 90 days or more past due are placed on nonaccrual status.

Nonaccrual Loans

When a loan is placed on nonaccrual, the accrued unpaid interest receivable is reversed against interest income and all future payments received are applied as a reduction to the loan principal. Generally, the loan is returned to accrual status when (a) all delinquent interest and principal become current under the terms of the loan agreement or (b) the loan is both well-secured and in the process of collection and collectability is no longer doubtful.

Impaired Loans

Management considers loans to be impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. Determination of impairment is treated the same across all loan categories. When management identifies a loan as impaired, the impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole source or repayment for the loan is the operation or liquidation of collateral. When the loan is collateral dependent, the appraised value less cost to sell is utilized. If management determines the value of the impaired loan is less than the recorded investment in the loan, impairment is recognized through an allowance estimate or a charge-off to the allowance. Troubled debt restructured loans on accrual status are considered to be impaired loans.

When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal, under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan is not in doubt and the loan is on nonaccrual status, contractual interest is credited to interest income when received, under the cash basis method.

Nonperforming loans, excluding loans held for sale, decreased $13.8 million to $84.9 million at June 30, 2012 compared to $98.8 million at December 31, 2011. Contributing to this decrease was an $11.3 million loan to a waste management company which was paid off in the first quarter and a $9.1 million loan to an information technology firm which was returned to accrual status in the second quarter. The most significant loans placed into nonperforming status during the first half of 2012 included $4.9 million for a commercial real estate loan to a nonprofit institution, $2.5 million to a manufacturer of medical equipment and $1.3 million on a residential lot development.

The specific allowance for nonperforming loans decreased by $1.5 million at June 30, 2012 compared to December 31, 2011. Unfunded commitments related to nonperforming loans were $4.8 million at June 30, 2012 and after consideration of available collateral related to these commitments, an off balance sheet reserve of $39 thousand was established.

Loans held for sale totaled $13.4 million at December 31, 2011 and the entire balance represented nonperforming loans. As of June 30, 2012, the sale of all of these loans had been completed and provided for a $2.9 million gain.

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 10 Loans and Allowance for Credit Losses (Continued)

Impaired Loans (Continued)

 

While these loans were considered to be nonperforming, they were not taken into consideration when determining the allowance for credit losses as they were carried at the lower of cost or fair value.

Significant nonaccrual loans as of June 30, 2012, include the following;

 

 

$19.4 million, the remaining portion of a $44.1 million unsecured loan to a western Pennsylvania real estate developer. This loan was originated in the second quarter of 2004 and was placed in nonaccrual status in the fourth quarter of 2009. A settlement plan with the borrower and three other lenders was reached in the fourth quarter of 2010 and resulted in an $8.0 million principal payment and a $15.4 million partial charge-off.

 

 

$16.3 million commercial real estate loan for a real estate developer in eastern Pennsylvania. This loan was originated in the third quarter of 2007 and restructured in the fourth quarter of 2011 and resulted in a charge-off of $4.2 million. The most recent appraisal for the real estate collateral was completed in the third quarter of 2011.

 

 

$5.7 million, the remaining portion of a $20.8 million construction loan for a Florida condominium project. This loan was originated in the second quarter of 2007. Charge-offs of $15.1 million have been recorded on this loan. The most recent appraisal for the real estate collateral was completed in the second quarter of 2012.

 

 

$4.9 million real estate secured loan to a western Pennsylvania nonprofit corporation. This loan was originated in the fourth quarter of 2008 and placed in nonaccrual status in the second quarter of 2012. The most recent appraisals for the various real estate collateral were completed in the fourth quarter of 2011 and the first quarter of 2012.

 

 

$3.4 million, the remaining portion of an $8.9 million commercial construction loan to a Nevada developer. This loan was originated in the second quarter of 2007. Charge-offs of $5.2 million have been recorded on this loan. The most recent appraisal was completed in the fourth quarter of 2011.

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 10 Loans and Allowance for Credit Losses (Continued)

Impaired Loans (Continued)

 

The following tables include the recorded investment and unpaid principal balance for impaired loans with the associated allowance amount, if applicable, as of June 30, 2012 and December 31, 2011. Also presented are the average recorded investment in impaired loans and the related amount of interest recognized while the loan was considered impaired. Average balances are calculated based on month-end balances of the loans of the period reported.

 

    June 30, 2012     December 31, 2011  
    Recorded
investment
    Unpaid
principal
balance
    Related
allowance
    Recorded
investment
    Unpaid
principal
balance
    Related
allowance
 
    (dollars in thousands)  

With no related allowance recorded:

           

Commercial, financial, agricultural and other

  $ 6,003      $ 7,034      $ 0      $ 2,010      $ 3,418      $ 0   

Real estate construction

    4,132        10,281        0        10,814        20,161        0   

Residential real estate

    3,050        3,498        0        3,125        3,513        0   

Commercial real estate

    30,303        31,888        0        36,777        41,974        0   

Loans to individuals

    0        0        0        0        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

    43,488        52,701        0        52,726        69,066        0   

With an allowance recorded:

           

Commercial, financial, agricultural and other

    25,972        26,685        8,046        34,056        34,341        9,069   

Real estate construction

    10,928        31,827        2,747        6,298        21,402        2,960   

Residential real estate

    1,820        1,820        431        955        955        93   

Commercial real estate

    2,735        2,939        510        4,717        4,863        1,114   

Loans to individuals

    0        0        0        0        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

    41,455        63,271        11,734        46,026        61,561        13,236   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 84,943      $ 115,972      $ 11,734      $ 98,752      $ 130,627      $ 13,236   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     For the Six-Months Ended June 30,  
     2012      2011  
     Average
recorded
investment
     Interest
Income
Recognized
     Average
recorded
investment
     Interest
Income
Recognized
 
     (dollars in thousands)  

With no related allowance recorded:

           

Commercial, financial, agricultural and other

   $ 10,291       $ 21       $ 3,167       $ 5   

Real estate construction

     7,268         0         12,727         2   

Residential real estate

     9,219         11         2,005         2   

Commercial real estate

     26,529         53         29,407         18   

Loans to individuals

     0         0         16         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     53,307         85         47,322         27   

With an allowance recorded:

           

Commercial, financial, agricultural and other

     19,101         6         27,026         76   

Real estate construction

     6,865         0         31,124         2   

Residential real estate

     797         14         506         0   

Commercial real estate

     2,028         0         29,292         177   

Loans to individuals

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     28,791         20         87,948         255   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 82,098       $ 105       $ 135,270       $ 282   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

25


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 10 Loans and Allowance for Credit Losses (Continued)

 

Impaired Loans (Continued)

 

     For the Three-Months Ended June 30,  
     2012      2011  
     Average
recorded
investment
     Interest
Income
Recognized
     Average
recorded
investment
     Interest
Income
Recognized
 
     (dollars in thousands)  

With no related allowance recorded:

           

Commercial, financial, agricultural and other

   $ 7,735       $ 3       $ 2,297       $ 2   

Real estate construction

     10,118         0         10,204         2   

Residential real estate

     15,082         6         1,987         1   

Commercial real estate

     25,696         19         26,255         7   

Loans to individuals

     0         0         7         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     58,631         28         40,750         12   

With an allowance recorded:

           

Commercial, financial, agricultural and other

     17,441         3         30,770         74   

Real estate construction

     4,068         0         31,701         1   

Residential real estate

     644         7         722         0   

Commercial real estate

     1,253         0         39,912         164   

Loans to individuals

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     23,406         10         103,105         239   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 82,037       $ 38       $ 143,855       $ 251   
  

 

 

    

 

 

    

 

 

    

 

 

 

Troubled debt restructured loans are those loans whose terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the financial difficulties experienced by the borrower, who could not obtain comparable terms from alternate financing sources.

 

The following table provides detail as to the total troubled debt restructured loans and total commitments outstanding on troubled debt restructured loans:

 

     June 30,
2012
     December 31,
2011
 
     (dollars in thousands)  

Troubled debt restructured loans

     

Accrual status

   $ 6,251       $ 20,276   

Nonaccrual status

     45,235         44,841   
  

 

 

    

 

 

 

Total

   $ 51,486       $ 65,117   
  

 

 

    

 

 

 

Commitments

     

Letters of credit

   $ 0       $ 12,580   

Unused lines of credit

     55         42   
  

 

 

    

 

 

 

Total

   $ 55       $ 12,622   
  

 

 

    

 

 

 

At June 30, 2012, troubled debt restructured loans on accruing status decreased $14.0 million compared to December 31, 2011 and commitments related to troubled debt restructured loans decreased $12.6 million for the same

 

26


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 10 Loans and Allowance for Credit Losses (Continued)

 

Impaired Loans (Continued)

 

period. These decreases are primarily a result of the payoff of an $11.3 million loan to a waste management company in Pennsylvania as a result of the sale of the business. In addition, a $2.2 million loan to a retail development company in western Pennsylvania paid off during the first quarter. During 2012 and 2011 the changes in loan balances between the pre-modification balance and the post-modification balance are due to customer payments.

The following tables provide detail, including specific reserve and reasons for modification, related to loans identified as troubled debt restructurings:

 

     For the Six-Months Ended June 30, 2012  
            Type of Modification                       
     Number
of
Contracts
     Extend
Maturity
     Modify
Rate
     Modify
Payments
     Total
Pre-Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
     Specific
Reserve
 
     (dollars in thousands)  

Commercial, financial, agricultural and other

     4       $ 447       $ 18       $ 6,029       $ 6,494       $ 6,494       $ 2,760   

Real estate construction

     1         823         0         0         823         815         0   

Residential real estate

     3         0         97         83         180         133         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     8       $ 1,270       $ 115       $ 6,112       $ 7,497       $ 7,442       $ 2,760   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     For the Six-Months Ended June 30, 2011  
            Type of Modification                       
     Number
of
Contracts
     Extend
Maturity
     Modify
Rate
     Modify
Payments
     Total
Pre-Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
     Specific
Reserve
 
     (dollars in thousands)  

Commercial, financial, agricultural and other

     9       $ 100       $ 105       $ 2,168       $ 2,373       $ 2,370       $ 720   

Real estate construction

     4         354         0         0         354         371         15   

Residential real estate

     3         0         27         75         102         101         0   

Commercial real estate

     15         17,163         199         1,497         18,859         18,758         1,743   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     31       $ 17,617       $ 331       $ 3,740       $ 21,688       $ 21,600       $ 2,478   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The troubled debt restructurings included in the above tables are also included in the impaired loan tables provided earlier in this note. Loans defined as modified due to a change in rate include loans that were modified for a change in rate as well as a reamortization of the principal and an extension of the maturity. For the six-months ended June 30, 2012 and 2011, $0.1 million and $0.3 million, respectively, of total rate modifications represent loans with modifications to the rate as well as payment due to reamortization.

 

27


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 10 Loans and Allowance for Credit Losses (Continued)

 

Impaired Loans (Continued)

 

The following tables provide detail, including specific reserve and reasons for modification, related to loans identified as troubled debt restructurings:

 

     For the Three-Months Ended June 30, 2012  
            Type of Modification                       
     Number
of
Contracts
     Extend
Maturity
     Modify
Rate
     Modify
Payments
     Total
Pre-Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
     Specific
Reserve
 
     (dollars in thousands)  

Commercial, financial, agricultural and other

     4       $ 447       $ 18       $ 6,029       $ 6,494       $ 6,494       $ 2,760   

Real estate construction

     1         823         0         0         823         815         0   

Residential real estate

     1         0         0         83         83         82         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     6       $ 1,270       $ 18       $ 6,112       $ 7,400       $ 7,391       $ 2,760   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     For the Three-Months Ended June 30, 2011  
            Type of Modification                       
     Number
of
Contracts
     Extend
Maturity
     Modify
Rate
     Modify
Payments
     Total
Pre-Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
     Specific
Reserve
 
     (dollars in thousands)  

Commercial, financial, agricultural and other

     0       $ 0       $ 0       $ 0       $ 0       $ 0       $ 0   

Real estate construction

     1         0         0         0         0         0         0   

Residential real estate

     2         0         15         75         90         90         0   

Commercial real estate

     4         10,033         0         849         10,882         10,839         250   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     7       $ 10,033       $ 15       $ 924       $ 10,972       $ 10,929       $ 250   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The troubled debt restructurings included in the above tables are also included in the impaired loan tables provided earlier in this note. Loans defined as modified due to a change in rate include loans that were modified for a change in rate as well as a reamortization of the principal and an extension of the maturity. For the three-months ended June 30, 2012 and 2011, $18 thousand and $15 thousand, respectively, of total rate modifications represent loans with modifications to the rate as well as payment due to reamortization.

During the three-months ended June 30, 2012, a $2.8 million nonaccrual loan to a water treatment plant and a $3.7 million accruing loan to a gas well servicing operation were each restructured with a twelve month principal forbearance. The nonaccrual loan is fully reserved for while the accruing loan is secured by company assets with no reserve allocation. These loans are part of a $21.0 million commercial loan relationship with a shallow gas well operator whose business has been impacted by the sharp decline in natural gas prices due to the success of Marcellus deep well drilling. In addition to these two loans, other loans in this relationship include loans to a related exploration and production company and loans to the principal which are secured by real estate and investment securities.

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 10 Loans and Allowance for Credit Losses (Continued)

 

Impaired Loans (Continued)

 

During the second quarter of 2011, a $0.2 million real estate construction commitment was originated to a customer whose relationship was previously restructured and classified as a troubled debt restructuring. As a result, this commitment was labeled as troubled debt even though no funds had been drawn. As a result, the commitment is listed in both the quarter-to-date and year-to-date tables even though it has no balance.

A troubled debt restructuring is considered to be in default when a restructured loan is 90 days or more past due. There were no restructured loans considered to default during the three-months ended June 30, 2012 and 2011. The following provides information related to restructured loans that were considered to default during the six-months ended June 30:

 

     2012      2011  
     Number of
Contracts
     Recorded
Investment
     Number of
Contracts
     Recorded
Investment
 
     (dollars in thousands)  

Commercial, financial, agricultural and other

     0       $ 0         1       $ 150   

Real estate construction

     0         0         1         88   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     0       $ 0         2       $ 238   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following tables provide detail related to the allowance for credit losses:

 

    For the Six-Months Ended June 30, 2012  
    Commercial,
financial,
agricultural
and other
    Real estate
construction
    Residential
real estate
    Commercial
real estate
    Loans to
individuals
    Unallocated     Total  
    (dollars in thousands)  

Allowance for credit losses:

             

Beginning Balance

  $ 18,200      $ 6,756      $ 8,237      $ 18,961      $ 4,244      $ 4,836      $ 61,234   

Charge-offs

    (3,668     (340     (2,454     (541     (1,738     0        (8,741

Recoveries

    275        92        282        186        264        0        1,099   

Provision

    4,495        1,493        554        (968     1,439        1,071        8,084   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $ 19,302      $ 8,001      $ 6,619      $ 17,638      $ 4,209      $ 5,907      $ 61,676   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impaired

  $ 8,046      $ 2,747      $ 431      $ 510      $ 0      $ 0      $ 11,734   

Ending balance: collectively evaluated for impaired

    11,256        5,254        6,188        17,128        4,209        5,907        49,942   

Loans:

             

Ending balance

    1,059,675        77,442        1,213,610        1,232,270        576,534          4,159,531   

Ending balance: individually evaluated for impaired

    31,271        14,915        2,911        31,493        0          80,590   

Ending balance: collectively evaluated for impaired

    1,028,404        62,527        1,210,699        1,200,777        576,534          4,078,941   

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 10 Loans and Allowance for Credit Losses (Continued)

 

Impaired Loans (Continued)

 

    For the Six-Months Ended June 30, 2011  
    Commercial,
financial,
agricultural
and other
    Real estate
construction
    Residential
real estate
    Commercial
real estate
    Loans to
individuals
    Unallocated     Total  
    (dollars in thousands)  

Allowance for credit losses:

             

Beginning Balance

  $ 21,700      $ 18,002      $ 5,454      $ 16,913      $ 4,215      $ 4,945      $ 71,229   

Charge-offs

    (2,957     (8,048     (1,700     (5,575     (1,522     0        (19,802

Recoveries

    261        0        96        164        289        0        810   

Provision

    4,171        7,747        3,020        7,278        888        (175     22,929   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $ 23,175      $ 17,701      $ 6,870      $ 18,780      $ 3,870      $ 4,770      $ 75,166   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impaired

  $ 12,717      $ 14,222      $ 216      $ 7,711      $ 0      $ 0      $ 34,866   

Ending balance: collectively evaluated for impaired

    10,458        3,479        6,654        11,069        3,870        4,770        40,300   

Loans:

             

Ending balance

    943,186        146,113        1,101,859        1,270,797        530,103          3,992,058   

Ending balance: individually evaluated for impaired

    40,447        37,087        2,174        63,743        0          143,451   

Ending balance: collectively evaluated for impaired

    902,739        109,026        1,099,685        1,207,054        530,103          3,848,607   

 

    For the Three-Months Ended June 30, 2012  
    Commercial,
financial,
agricultural
and other
    Real estate
construction
    Residential
real estate
    Commercial
real estate
    Loans to
individuals
    Unallocated     Total  
    (dollars in thousands)  

Allowance for credit losses:

             

Beginning Balance

  $ 18,143      $  6,427      $  6,702      $  19,371      $  4,252      $  5,837      $ 60,732   

Charge-offs

    (1,754     (150     (742     (306     (797     0        (3,749

Recoveries

    37        36        149        28        146        0        396   

Provision

    2,876        1,688        510        (1,455     608        70        4,297   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $ 19,302      $ 8,001      $ 6,619      $ 17,638      $ 4,209      $ 5,907      $ 61,676   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    For the Three-Months Ended June 30, 2011  
    Commercial,
financial,
agricultural
and other
    Real estate
construction
    Residential
real estate
    Commercial
real estate
    Loans to
individuals
    Unallocated     Total  
    (dollars in thousands)  

Allowance for credit losses:

             

Beginning Balance

  $ 22,436      $ 18,779      $ 6,682      $ 20,174      $ 3,861      $ 4,860      $ 76,792   

Charge-offs

    (1,997     (3,049     (596     (4,809     (743     0        (11,194

Recoveries

    157        0        77        88        134        0        456   

Provision

    2,579        1,971        707        3,327        618        (90     9,112   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $ 23,175      $ 17,701      $ 6,870      $ 18,780      $ 3,870      $ 4,770      $ 75,166   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 11 Income Taxes

At June 30, 2012 and December 31, 2011, First Commonwealth had no material unrecognized tax benefits or accrued interest and penalties. If applicable, First Commonwealth will record interest and penalties as a component of noninterest expense. Federal and state tax years 2008 through 2011 were open for examination as of June 30, 2012.

Note 12 Fair Values of Assets and Liabilities

FASB ASC Topic 820, “Fair Value Measurements and Disclosures” requires disclosures for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). All non-financial assets are included either as a separate line item on the Condensed Consolidated Statements of Financial Condition or in the “Other assets” category of the Condensed Consolidated Statements of Financial Condition. Currently, First Commonwealth does not have any non-financial liabilities to disclose.

FASB ASC Topic 825, “Financial Instruments” permits entities to irrevocably elect to measure select financial instruments and certain other items at fair value. The unrealized gains and losses are required to be included in earnings each reporting period for the items that fair value measurement is elected. First Commonwealth has elected not to measure any existing financial instruments at fair value under FASB ASC Topic 825; however, in the future we may elect to adopt this guidance for select financial instruments.

In accordance with FASB ASC Topic 820, First Commonwealth groups financial assets and financial liabilities measured at fair value in three levels based on the principal markets in which the assets and liabilities are transacted and the observability of the data points used to determine fair value. These levels are:

 

 

Level 1 – Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange (“NYSE”). Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. Level 1 securities include equity holdings comprised of publicly traded bank stocks which were priced using quoted market prices.

 

 

Level 2 – Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained for identical or comparable assets or liabilities from alternative pricing sources with reasonable levels of price transparency. Level 2 includes Obligations of U.S. Government securities issued by Agencies and Sponsored Enterprises, Obligations of States and Political Subdivisions, certain corporate securities, certain equity securities, FHLB stock, interest rate derivatives that include interest rate swaps and risk participation agreements, certain other real estate owned and certain impaired loans.

Level 2 investment securities are valued by a recognized third party pricing service using observable inputs. The model used by the pricing service varies by asset class and incorporates available market, trade and bid information as well as cash flow information when applicable. Because many fixed-income investment securities do not trade on a daily basis, the model uses available information such as benchmark yield curves, benchmarking of like investment securities, sector groupings and matrix pricing. The model will also use processes such as an option adjusted spread to assess the impact of interest rates and to develop prepayment estimates. Market inputs normally used in the pricing model include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications.

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 12 Fair Values of Assets and Liabilities (Continued)

 

Management validates the market values provided by the third party service by having another recognized pricing service price a random sample of securities each quarter, monthly monitoring of variances from prior period pricing and, on a monthly basis, evaluating pricing changes compared to expectations based on changes in the financial markets.

The equity investments included in Level 2 are based on broker prices and are included in Level 2 because they are not traded on an active exchange market.

Other investments are comprised of FHLB stock whose fair value is based on its par value. Additional information on FHLB stock is provided in Note 8, “Other Investments.”

Interest rate derivatives are reported at an estimated fair value utilizing Level 2 inputs and are included in other assets and other liabilities and consist of interest rate swaps where there is no significant deterioration in the counterparties (loan customers) credit risk since origination of the interest rate swap. First Commonwealth values its interest rate swap positions using a yield curve by taking market prices/rates for an appropriate set of instruments. The set of instruments currently used to determine the U.S. Dollar yield curve includes cash LIBOR rates from overnight to three months, Eurodollar futures contracts and swap rates from three years to thirty years. These yield curves determine the valuations of interest rate swaps. Interest rate derivatives are further described in Note 13, “Derivatives.”

For purposes of potential valuation adjustments to our derivative positions, First Commonwealth evaluates the credit risk of its counterparties as well as our own credit risk. Accordingly, we have considered factors such as the likelihood of default, expected loss given default, net exposures and remaining contractual life, among other things, in determining if any fair value adjustments related to credit risk are required. We review our counterparty exposure quarterly, and when necessary, appropriate adjustments are made to reflect the exposure.

We also utilize this approach to estimate our own credit risk on derivative liability positions. In 2012, we have not realized any losses due to a counterparty’s inability to pay any net uncollateralized position.

The fair value for other real estate owned included in Level 2 is determined by either an independent market based appraisal less costs to sell or an executed sales agreement.

 

 

Level 3 – Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker traded transactions. If the inputs used to provide the valuation are unobservable and/or there is very little, if any, market activity for the security or similar securities, the securities would be considered Level 3 securities. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. The assets included in Level 3 are pooled trust preferred collateralized debt obligations, non-marketable equity investments, loans held for sale and certain interest rate derivatives.

Our pooled trust preferred collateralized debt obligations are collateralized by the trust preferred securities of individual banks, thrifts and bank holding companies in the U.S. There has been little or no active trading in these securities since 2009; therefore it was more appropriate to determine fair value using a discounted cash flow analysis. Detail on our process for determining the appropriate cash flows for this analysis is provided in Note 9, “Impairment of Investment Securities.” The discount rate applied to the cash flows is determined by evaluating the current market yields for comparable corporate and structured credit products along with an evaluation of the risks associated with the cash

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 12 Fair Values of Assets and Liabilities (Continued)

 

flows of the comparable security. Due to the fact that there is no active market for the pooled trust preferred collateralized debt obligations, one key reference point is the market yield for the single issue trust preferred securities issued by banks and thrifts for which there is more activity than for the pooled securities. Adjustments are then made to reflect the credit and structural differences between these two security types.

Management validates the fair value of the pooled trust preferred collateralized debt obligations by monitoring the performance of the underlying collateral, discussing the discount rate, cash flow assumptions and general market trends with the specialized third party and confirming changes in the underlying collateral to the trustee reports. Management’s monitoring of the underlying collateral includes deferrals of interest payments, payment defaults, cures of previously deferred interest payments, any regulatory filings or actions and general news related to the underlying collateral. Management also evaluates fair value changes compared to expectations based on changes in the interest rates used in determining the discount rate and general financial markets.

The estimated fair value of the non-marketable equity investments included in level 3 is based on par value.

Loans held for sale are carried at the lower of cost or fair value with the fair value being the expected sales price of the loan. The estimated fair value of the loans held for sale was determined by calculating the discounted expected future cash flows of the loan. The discount rate applied to the future cash flows was determined based on a risk based expected return and capital structure of potential buyers. If a sales agreement has been executed, the fair value is equal to the sales price.

For interest rate derivatives included in Level 3, the fair value incorporates credit risk by considering such factors as likelihood of default and expected loss given default based on the credit quality of the underlying counterparties (loan customers).

In 2012, we have not realized any losses due to a counterparty’s inability to pay any net uncollateralized position. However, as the result of deterioration in the counterparties (loan customers) credit quality for certain interest rate derivatives, future amounts previously believed to be collectible under the terms of the interest rate derivative have now been deemed to be uncollectible.

In accordance with ASU 2011-04, the following table provides information related to quantitative inputs and assumptions used in Level 3 fair value measurements.

 

    Fair Value (dollars
in thousands)
  Valuation
Technique
   Unobservable Inputs    Range /
(weighted average)

Pooled Trust Preferred
Securities

  $21,792   Discounted Cash Flow    Probability of default    0% -100% (22.29%)
       Prepayment rates    0% -100% (13.21%)
       Discount rates    7% - 20%(a)

Other Investments

  1,420   Par Value    N/A    N/A

Interest Rate Swap

  0   Option model    Counterparty credit risk    66.49% -132.21%(b)

Impaired Loans

  20,745(c)   Discounted Cash Flow    Discount rate    8.42% - 21%

Other Real Estate Owned

  353   Internal Valuation    N/A    N/A

 

(a) incorporates premium related to credit quality and illiquidity of securities.
(b) represents the range of the credit spread curve used in valuation.
(c) the remainder of impaired loans valued using Level 3 inputs are not included in this disclosure as the values of those loans are based on bankruptcy agreement documentation

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 12 Fair Values of Assets and Liabilities (Continued)

 

The significant unobservable inputs used in the fair value measurement of pooled trust preferred securities are the probability of default, discount rates and prepayment rates. Significant increases in the probability of default or discount rate used would result in a decrease in the estimated fair value of these securities while decreases in these variables would result in higher fair value measurements. In general, a change in the assumption of probability of default is accompanied by a directionally similar change in the discount rate. In most cases, increases in the prepayment rate assumptions would result in a higher estimated fair value for these securities while decreases would provide for a lower value. The direction of this change is somewhat dependent on the structure of the investment and the amount of the investment tranches senior to our position.

The discount rate is the significant unobservable input used in the fair value measurement of impaired loans. Significant increases in this rate would result in a decrease in the estimated fair value of the loans, while a decrease in this rate would result in higher fair value measurement.

The significant unobservable input used in the fair value measurement of interest rate swaps classified as Level 3 is counterparty credit risk and the resulting range of the credit spread curve used in the valuation. Higher credit risk would result in an increased credit spread, which would reduce the fair value of the interest rate swap.

The tables below present the balances of assets and liabilities measured at fair value on a recurring basis:

 

     June 30, 2012  
     Level 1      Level 2      Level 3      Total  
     (dollars in thousands)  

Obligations of U.S. Government Agencies:

           

Mortgage-Backed Securities—Residential

   $ 0       $ 34,620       $ 0       $ 34,620   

Obligations of U.S. Government-Sponsored Enterprises:

           

Mortgage-Backed Securities—Residential

     0         845,739         0         845,739   

Mortgage-Backed Securities—Commercial

     0         177         0         177   

Other Government-Sponsored Enterprises

     0         242,566         0         242,566   

Obligations of States and Political Subdivisions

     0         449         0         449   

Corporate Securities

     0         11,999         0         11,999   

Pooled Trust Preferred Collateralized Debt Obligations

     0         0         21,792         21,792   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Debt Securities

     0         1,135,550         21,792         1,157,342   

Equities

     440         0         1,420         1,860   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities Available for Sale

     440         1,135,550         23,212         1,159,202   

Other Investments

     0         35,916         0         35,916   

Other Assets(a)

     0         17,620         0         17,620   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 440       $ 1,189,086       $ 23,212       $ 1,212,738   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Liabilities(a)

   $ 0       $ 19,860       $ 0       $ 19,860   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

   $ 0       $ 19,860       $ 0       $ 19,860   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Non-hedging interest rate derivatives

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 12 Fair Values of Assets and Liabilities (Continued)

 

     December 31, 2011  
     Level 1      Level 2      Level 3      Total  
     (dollars in thousands)  

Obligations of U.S. Government Agencies:

           

Mortgage-Backed Securities—Residential

   $ 0       $ 36,194       $ 0       $ 36,194   

Obligations of U.S. Government-Sponsored Enterprises:

           

Mortgage-Backed Securities—Residential

     0         801,031         0         801,031   

Mortgage-Backed Securities—Commercial

     0         193         0         193   

Other Government-Sponsored Enterprises

     0         268,648         0         268,648   

Obligations of States and Political Subdivisions

     0         459         0         459   

Corporate Securities

     0         11,411         0         11,411   

Pooled Trust Preferred Collateralized Debt Obligations

     0         0         22,980         22,980   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Debt Securities

     0         1,117,936         22,980         1,140,916   

Equities

     440         0         1,420         1,860   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities Available for Sale

     440         1,117,936         24,400         1,142,776   

Other Investments

     0         39,796         0         39,796   

Loans Held for Sale

     0         0         13,412         13,412   

Other Assets(a)

     0         16,064         0         16,064   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 440       $ 1,173,796       $ 37,812       $ 1,212,048   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Liabilities(a)

   $ 0       $ 18,986       $ 0       $ 18,986   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

   $ 0       $ 18,986       $ 0       $ 18,986   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Non-hedging interest rate derivatives

For the six-month periods ended June 30, changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:

 

     2012  
     Pooled Trust
Preferred
Collateralized
Debt
Obligations
    Equities      Loans
Held for
Sale
    Other
Assets
    Total  
     (dollars in thousands)  

Balance, beginning of period

   $ 22,980      $ 1,420       $ 13,412      $ 0      $ 37,812   

Total gains or losses

           

Included in earnings

     0        0         2,870        (461     2,409   

Included in other comprehensive income

     1,580        0         0        0        1,580   

Purchases, issuances, sales, and settlements

           

Purchases

     0        0         0        0        0   

Issuances

     0        0         0        0        0   

Sales

     0        0         (15,981     0        (15,981

Settlements

     (2,768     0         (301     0        (3,069

Transfers into Level 3

     0        0         0        461        461   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 21,792      $ 1,420       $ 0      $ 0      $ 23,212   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 12 Fair Values of Assets and Liabilities (Continued)

 

     2011  
     Obligations
of States
and Political
Subdivisions
    Corporate
Securities
    Pooled Trust
Preferred
Collateralized
Debt
Obligations
    Equities      Total  
     (dollars in thousands)  

Balance, beginning of period

   $ 343      $ 21,376      $ 26,352      $ 1,570       $ 49,641   

Total gains or losses

           

Included in earnings

     4        387        0        0         391   

Included in other comprehensive income

     (20     (98     3,020        0         2,902   

Purchases, issuances, sales, and settlements

           

Purchases

     0        0        0        0         0   

Issuances

     0        0        0        0         0   

Sales

     (327     (6,700     0        0         (7,027

Settlements

     0        (3,000     (2,388     0         (5,388

Transfers from Level 3

     0        (11,965     0        0         (11,965
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, end of period

   $ 0      $ 0      $ 26,984      $ 1,570       $ 28,554   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

For the six-months ended June 30, 2012, there were no transfers between fair value Levels 1 and 2. However, $0.5 million of interest rate swaps were transferred into Level 3 from Level 2 due to deterioration of the counterparty’s credit risk. Because the credit quality of the underlying counterparty declined below investment grade, the swaps were valued utilizing more than interest rate yield curves. For the six-months ended June 30, 2011, $12.0 million of corporate securities were transferred from Level 3 to Level 2. Corporate securities were transferred from Level 3 to Level 2 based on increased frequency in the volume of observable trades. Fair values on these securities at June 30, 2011 were determined based on market data, including trade and bid prices. There were no gains or losses included in earnings for the periods presented that are attributable to the change in realized gains (losses) relating to assets held at June 30, 2012 and 2011.

For the three-month periods ended June 30, changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:

 

     2012  
     Pooled Trust
Preferred
Collateralized
Debt
Obligations
    Equities      Loans
Held for
Sale
    Other
Assets
     Total  
     (dollars in thousands)  

Balance, beginning of period

   $ 24,508      $ 1,420       $ 8,076      $ 0       $ 34,004   

Total gains or losses

            

Included in earnings

     0        0         1,102        0         1,102   

Included in other comprehensive income

     (688     0         0        0         (688

Purchases, issuances, sales, and settlements

            

Purchases

     0        0         0        0         0   

Issuances

     0        0         0        0         0   

Sales

     0        0         (9,172     0         (9,172

Settlements

     (2,028     0         (6     0         (2,034

Transfers from Level 3

     0        0         0        0         0   

Transfers into Level 3

     0        0         0        0         0   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Balance, end of period

   $ 21,792      $ 1,420       $ 0      $ 0       $ 23,212   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 12 Fair Values of Assets and Liabilities (Continued)

 

     2011  
     Obligations
of States
and Political
Subdivisions
     Corporate
Securities
    Pooled Trust
Preferred
Collateralized
Debt
Obligations
    Equities      Total  
     (dollars in thousands)  

Balance, beginning of period

   $ 0       $ 14,815      $ 27,665      $ 1,570       $ 44,050   

Total gains or losses

            

Included in earnings

     0         73        0        0         73   

Included in other comprehensive income

     0         77        898        0         975   

Purchases, issuances, sales, and settlements

            

Purchases

     0         0        0        0         0   

Issuances

     0         0        0        0         0   

Sales

     0         0        0        0         0   

Settlements

     0         (3,000     (1,579     0         (4,579

Transfers from Level 3

     0         (11,965     0        0         (11,965
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance, end of period

   $ 0       $ 0      $ 26,984      $ 1,570       $ 28,554   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

For the three-months ended June 30, 2012, there were no transfers of securities between Levels 1, 2 or 3. For the three-months ended June 30, 2011, $12.0 million of corporate securities were transferred from Level 3 to Level 2. Corporate securities were transferred from Level 3 to Level 2 based on increased frequency in the volume of observable trades. Fair values on these securities at June 30, 2011 were determined based on market data, including trade and bid prices. There were no gains or losses included in earnings for the periods presented that are attributable to the change in realized gains (losses) relating to assets held at June 30, 2012 and 2011.

The tables below present the balances of assets measured at fair value on a non-recurring basis at:

 

     June 30, 2012  
     Level 1      Level 2      Level 3      Total  
     (dollars in thousands)  

Impaired loans

   $ 0       $ 50,473       $ 22,736       $ 73,209   

Other real estate owned

     0         19,250         353         19,603   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 0       $ 69,723       $ 23,089       $ 92,812   
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2011  
     Level 1      Level 2      Level 3      Total  
     (dollars in thousands)  

Impaired loans

   $ 0       $ 73,783       $ 26,349       $ 100,132   

Other real estate owned

     0         31,232         438         31,670   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 0       $ 105,015       $ 26,787       $ 131,802   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 12 Fair Values of Assets and Liabilities (Continued)

 

The following losses were realized on the assets measured on a nonrecurring basis:

 

     For the Three-Months
Ended June 30,
    For the Six-Months
Ended June 30,
 
     2012     2011     2012     2011  
     (dollars in thousands)  

Impaired loans

   $ (3,086   $ (10,297   $ (3,742   $ (21,157

Other real estate owned

     (163     (4,124     (3,017     (4,124
  

 

 

   

 

 

   

 

 

   

 

 

 

Total losses

   $ (3,249   $ (14,421   $ (6,759   $ (25,281
  

 

 

   

 

 

   

 

 

   

 

 

 

Impaired loans over $0.1 million are individually reviewed to determine the amount of each loan considered to be at risk of non-collection. The fair value for impaired loans that are collateral based is determined by reviewing real property appraisals, equipment valuations, accounts receivable listings and other financial information. A discounted cash flow analysis is performed to determine fair value for impaired loans when an observable market price or a current appraisal is not available. First Commonwealth’s loan policy requires updated appraisals be obtained at least every twelve months on all impaired loans with balances of $250 thousand and over.

The fair value for other real estate owned is determined by either an independent market based appraisal less costs to sell or an executed sales agreement and is classified as Level 2. Other real estate owned has a book cost of $19.1 million as of June 30, 2012 and consisted primarily of a manufacturing plant in northern Pennsylvania, residential real estate in eastern Pennsylvania and a hotel/resort in Illinois. During the first quarter of 2012, the sale of an office building in western Pennsylvania which was previously in OREO for $6.8 million was completed and resulted in a $0.3 million loss at the time of sale. We review whether events and circumstances subsequent to a transfer to other real estate owned have occurred that indicate the balance of those assets may not be recoverable. If events and circumstances indicate further impairment we will record a charge to the extent that the carrying value of the assets exceed their fair values, less cost to sell, as determined by valuation techniques appropriate in the circumstances.

Certain other assets and liabilities, including goodwill and core deposit intangibles, are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. Additional information related to goodwill is provided in Note 14, “Goodwill.” There were no other assets or liabilities measured at fair value on a non-recurring basis during the six-months ended June 30, 2012.

FASB ASC 825-10, “Transition Related to FSP FAS 107-1” and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or nonrecurring basis are as discussed above. The methodologies for other financial assets and financial liabilities are discussed below.

Cash and due from banks and interest-bearing bank deposits: The carrying amounts for cash and due from banks and interest-bearing bank deposits approximate the estimated fair values of such assets.

Securities: Fair values for securities available for sale are based on quoted market prices, if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Pooled trust preferred collateralized debt obligations values are derived from other valuation methodologies, including

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 12 Fair Values of Assets and Liabilities (Continued)

 

option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker traded transactions. These valuations incorporate certain assumptions and projections in determining the fair value assigned to each instrument. The carrying value of other investments, which includes FHLB stock, is considered a reasonable estimate of fair value.

Loans held for sale: The fair value of loans held for sale is estimated utilizing a present value of future discounted cash flows of the loan utilizing a risk based expected return to discount the value unless a sales agreement has been executed, in which case the sales price would equal fair value.

Loans: The fair values of all loans are estimated by discounting the estimated future cash flows using interest rates currently offered for loans with similar terms to borrowers of similar credit quality adjusted for past due and nonperforming loans, which is not an exit price under FASB ASC Topic 820, “Fair Value Measurements and Disclosures.”

Off-balance sheet instruments: Many of First Commonwealth’s off-balance sheet instruments, primarily loan commitments and standby letters of credit, are expected to expire without being drawn upon; therefore, the commitment amounts do not necessarily represent future cash requirements. FASB ASC Topic 460, “Guarantees” clarified that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The carrying amount and fair value for standby letters of credit was $0.1 million at June 30, 2012 and December 31, 2011. See Note 6, “Commitments and Contingent Liabilities,” for additional information.

Deposit liabilities: Management estimates that the fair value of deposits is based on a market valuation of similar deposits. The carrying value of variable rate time deposit accounts and certificates of deposit approximate their fair values at the report date. Also, fair values of fixed rate time deposits for both periods are estimated by discounting the future cash flows using interest rates currently being offered and a schedule of aggregated expected maturities.

Short-term borrowings: The fair values of borrowings from the FHLB were estimated based on the estimated incremental borrowing rate for similar types of borrowings. The carrying amounts of other short-term borrowings such as federal funds purchased and securities sold under agreement to repurchase were used to approximate fair value due to the short-term nature of the borrowings.

Long-term debt and subordinated debt: The fair value of long-term debt and subordinated debt is estimated by discounting the future cash flows using First Commonwealth’s estimated incremental borrowing rate for similar types of borrowing arrangements.

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 12 Fair Values of Assets and Liabilities (Continued)

 

The following table presents carrying amounts and fair values of First Commonwealth’s financial instruments:

 

     June 30, 2012  
            Fair Value Measurements Using:  
     Carrying
Amount
     Total      Level 1      Level 2      Level 3  
     (dollars in thousands)  

Financial assets

              

Cash and due from banks

   $ 82,659       $ 82,659       $ 82,659       $ 0       $ 0   

Interest-bearing deposits

     3,839         3,839         3,839         0         0   

Securities available for sale

     1,159,202         1,159,202         440         1,135,550         23,212   

Other investments

     35,916         35,916         0         35,916         0   

Loans

     4,159,531         4,220,966         0         50,473         4,170,493   

Financial liabilities

              

Deposits

     4,461,962         4,405,479         0         4,405,479         0   

Short-term borrowings

     474,264         474,255         0         474,255         0   

Long-term debt

     75,370         78,068         0         78,068         0   

Subordinated debt

     105,750         74,646         0         0         74,646   

 

     December 31, 2011  
     Carrying
Amount
     Estimated
Fair Value
 
     (dollars in thousands)   

Financial assets

     

Cash and due from banks

   $ 74,967       $ 74,967   

Interest-bearing deposits

     3,511         3,511   

Securities available for sale

     1,142,776         1,142,776   

Other investments

     39,796         39,796   

Loans held for sale

     13,412         13,412   

Loans

     4,043,643         4,113,525   

Financial liabilities

     

Deposits

     4,504,684         4,452,235   

Short-term borrowings

     312,777         312,777   

Long-term debt

     101,664         103,749   

Subordinated debt

     105,750         75,310   

Note 13 Derivatives

First Commonwealth is a party to interest rate derivatives that are not designated as accounting hedges. These derivatives relate to interest rate swaps that First Commonwealth enters into with customers to allow customers to convert variable rate loans to a fixed rate. First Commonwealth pays interest to the customer at a floating rate on the notional amount and receives interest from the customer at a fixed rate for the same notional amount. At the same time the interest rate swap is entered into with the customer, an offsetting interest rate swap is entered into with another financial institution. First Commonwealth pays the other financial institution interest at the same fixed rate on the same notional amount as the swap entered into with the customer, and receives interest from the financial institution for the same floating rate on the same notional amount. The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined by taking into consideration the risk rating, probability of default and loss of given default for all counterparties.

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 13 Derivatives (Continued)

 

We have nine risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are a participant. The risk participation agreements provide credit protection to the financial institution should the borrower fail to perform on its interest rate derivative contract with the financial institution.

The fee received, less the estimate of the loss for the credit exposure, was recognized in earnings at the time of the transaction.

The following table depicts the credit value adjustment recorded related to the notional amount of derivatives outstanding as well as the notional amount of risk participation agreements participated to other banks:

 

     June 30,     December 31,  
     2012     2011  
     (dollars in thousands)  

Credit value adjustment

   $ (2,211   $ (2,963

Notional Amount:

    

Interest rate derivatives

     208,855        187,368   

Risk participation agreements

     53,741        128,098   

Sold credit protection on risk participation agreements

     0        (22,147

The table below presents the amount representing the change in the fair value of derivative assets and derivative liabilities attributable to credit risk included in other income on the Condensed Consolidated Statements of Income:

 

     For the  Three-
Months Ended
June 30,
    For  the
Six-Months
Ended June 30,
 
     2012      2011     2012      2011  
     (dollars in thousands)  

Non-hedging interest rate derivatives:

          

Increase (decrease) in other income

   $ 144       $ (743   $ 750       $ (535

During 2012, total credit risk income of $1.0 million was recognized, offset by $0.2 million in expense related to three interest rate swaps that were downgraded during the first quarter to a below investment grade rating. As a result of the deterioration of credit risk related to the counterparty, a larger mark-to-market adjustment was recorded. The fair value of our derivatives is included in a table in Note 12 “Fair Values of Assets and Liabilities,” in the line items other assets and other liabilities.

Note 14 Goodwill

FASB ASC Topic 350-20, “Intangibles – Goodwill and Other” requires an annual valuation of the fair value of a reporting unit that has goodwill and a comparison of the fair value to the book value of equity to determine whether the goodwill has been impaired. Goodwill is also required to be tested on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. When triggering events or circumstances indicate goodwill testing is required, an assessment of qualitative factors can be completed before performing the two step goodwill impairment test. ASU 2011-08 provides that if an assessment of qualitative factors determines it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, then the two step goodwill impairment test is not required.

First Commonwealth is considered to be one reporting unit. The carrying amount of goodwill as of June 30, 2012 and December 31, 2011 was $159.9 million. No impairment charges on goodwill or other intangible assets were incurred in 2012 or 2011.

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 14 Goodwill (Continued)

 

We test goodwill for impairment as of November 30th each year and again at any quarter-end if any material events occur during a quarter that may affect goodwill. An assessment of qualitative factors was completed as of June 30, 2012 and indicated that it is more likely than not that the fair value of First Commonwealth exceeds its carrying amount, therefore the two step goodwill impairment test was not considered necessary. The assessment of qualitative factors incorporated the results of the step 2 goodwill impairment test completed as of December 31, 2011 as well as macroeconomic factors, industry and market considerations, the company’s overall financial performance, and other company specific events occurring during the first six months of 2012.

As of June 30, 2012, goodwill was not considered impaired; however, changing economic conditions that may adversely affect our performance, fair value of our assets and liabilities, or stock price could result in impairment, which could adversely affect earnings in future periods. Management will continue to monitor events that could impact this conclusion in the future.

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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 six-months ended June 30, 2012 and 2011, 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 include statements relating to our anticipated future financial performance, projected growth and management’s long-term performance goals, as well as statements relating to the anticipated effects on results of operations and financial condition from developments or events, our business and growth strategies.

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;

 

   

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;

 

   

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

 

   

fluctuations in interest rates and market prices, which could reduce our net interest margin and asset valuations and increase our expenses;

 

   

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;

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. Management’s Discussion and Analysis of Financial Condition and

Results of Operations (Continued)

 

Forward-Looking Statements (Continued)

 

   

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.

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 46 for the six-months ended June 30, 2012 and 2011.

Results of Operations

Six-Months Ended June 30, 2012 Compared to Six-Months Ended June 30, 2011

Net Income

For the six-months ended June 30, 2012, First Commonwealth had net income of $23.4 million, or $0.22 per share, compared to net income of $12.7 million or $0.12 per share in the six-months ended June 30, 2011. The increase in net income is primarily the result of a lower provision for credit losses and higher gains recognized on the sale of assets offset by higher salaries and employee benefit expenses and other operating expenses and the absence of net gains on securities.

Net Interest Income

Net interest income, on a fully taxable equivalent basis, was $97.4 million in the first half of 2012 compared to $97.7 million for the same period in 2011. Net interest income comprises a majority of our operating revenue (net interest income before the provision plus noninterest income) at 74% and 75% for the six-months ended June 30, 2012 and 2011, respectively.

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. Management’s Discussion and Analysis of Financial Condition and

Results of Operations (Continued)

 

Results of Operations (Continued)

 

Net Interest Income (Continued)

 

Net interest margin, on a fully taxable equivalent basis, was 3.68% for the six-months ended June 30, 2012 compared to 3.81% for the six-months ended June 30, 2011. The net interest margin is affected by both changes in the level of interest rates and the amount and composition of interest-earning assets and interest-bearing liabilities.

During the six-months ended June 30, 2012, the net interest margin has been challenged by the continuing low interest rate environment and decreasing rates earned on interest bearing assets. 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 a lower yield on earning assets. Growth in earning assets has helped to offset the impact of runoff, as average earning assets for the six months ended June 30, 2012 increased $160.1 million, or 3.1%, compared to the comparable period in 2011. It is expected that the challenges to the net interest margin will continue during 2012 as $2.4 billion in interest-sensitive assets either reprice or mature over the next six months.

The taxable equivalent yield on interest-earning assets was 4.29% for the six-months ended June 30, 2012, a decrease of 41 basis points from the 4.70% yield for the same period in 2011. 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 0.76% for the six-months ended June 30, 2012, compared to 1.08% for the same period in 2011. Also, impacting the net interest margin in the first half of 2012 was the recognition of $1.0 million in interest income related to the payoff of a loan that was previously in nonaccrual status. This contributed 4 basis points to the net interest margin for the six-months ended June 30, 2012.

Comparing the six-months ended June 30, 2012 with the same period in 2011, changes in interest rates negatively impacted net interest income by $4.9 million. The lower yield on interest-earning assets adversely impacted net interest income by $9.8 million, while the decline in the cost of interest-bearing liabilities had a positive impact of $4.9 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 and increasing our investment volumes within established interest rate risk management guidelines.

While decreases in interest rates and yields compressed the net interest rate, increases in average interest-earning assets and low cost average interest-bearing liabilities neutralized the effect on net interest income. Changes in the volumes of interest-earning assets and interest-bearing liabilities positively impacted net interest income by $4.6 million in the six-months ended June 30, 2012 compared to the same period in 2011. Higher levels of interest-earning assets resulted in an increase of $3.0 million in interest income, while volume changes primarily attributed to the mix of deposits reduced interest expense by $1.6 million.

Positively affecting net interest income was a $83.7 million increase in average net free funds at June 30, 2012 as compared to June 30, 2011. 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 runoff and reprice to lower costing certificates or other deposit alternatives. Average

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. Management’s Discussion and Analysis of Financial Condition and

Results of Operations (Continued)

 

Results of Operations (Continued)

 

Net Interest Income (Continued)

 

time deposits for the six months ended June 30, 2012 decreased $246.8 million, or 17%, compared to the comparable period in 2011. The positive change in deposit mix is expected to continue during the remainder of 2012 as $345.4 million in certificates of deposits either mature or reprice over the next six 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 six-months ended June 30:

 

     2012      2011  
     (dollars in thousands)  

Interest income per Condensed Consolidated Statements of Income

   $ 111,328       $ 117,458   

Adjustment to fully taxable equivalent basis

     2,307         2,939   
  

 

 

    

 

 

 

Interest income adjusted to fully taxable equivalent basis (non-GAAP)

     113,635         120,397   

Interest expense

     16,240         22,704   
  

 

 

    

 

 

 

Net interest income adjusted to fully taxable equivalent basis (non-GAAP)

   $ 97,395       $ 97,693   
  

 

 

    

 

 

 

 

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The following is an analysis of the average balance sheets and net interest income on a fully taxable equivalent basis, for the six-months ended June 30:

 

    2012     2011  
    Average
Balance
    Income /
Expense (a)
    Yield
or
Rate
    Average
Balance
    Income /
Expense (a)
    Yield
or
Rate
 
    (dollars in thousands)  
Assets            

Interest-earning assets:

           

Interest-bearing deposits with banks

  $ 3,580      $ 2        0.11   $ 28,772      $ 36        0.25

Tax-free investment securities

    454        16        7.09        9,165        306        6.73   

Taxable investment securities

    1,192,914        16,868        2.84        1,014,015        16,961        3.37   

Loans, net of unearned income (b)(c)

    4,129,977        96,749        4.71        4,114,862        103,094        5.05   
 

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-earning assets

    5,326,925        113,635        4.29        5,166,814        120,397        4.70   
 

 

 

   

 

 

     

 

 

   

 

 

   

Noninterest-earning assets:

           

Cash

    74,069            74,782       

Allowance for credit losses

    (64,203         (78,046    

Other assets

    586,509            588,787       
 

 

 

       

 

 

     

Total noninterest-earning assets

    596,375            585,523       
 

 

 

       

 

 

     

Total Assets

  $ 5,923,300          $ 5,752,337       
 

 

 

       

 

 

     

Liabilities and Shareholders’ Equity

           

Interest-bearing liabilities:

           

Interest-bearing demand deposits (d)

  $ 636,382      $ 158        0.05   $ 600,631      $ 269        0.09

Savings deposits (d)

    1,928,454        2,299        0.24        1,867,509        3,929        0.42   

Time deposits

    1,184,338        9,433        1.60        1,431,108        14,431        2.03   

Short-term borrowings

    378,407        506        0.27        165,141        363        0.44   

Long-term debt

    195,614        3,844        3.95        182,393        3,712        4.10   
 

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities

    4,323,195        16,240        0.76        4,246,782        22,704        1.08   
 

 

 

   

 

 

     

 

 

   

 

 

   

Noninterest-bearing liabilities and shareholders’ equity:

           

Noninterest-bearing demand deposits (d)

    780,611            700,713       

Other liabilities

    50,519            47,304       

Shareholders’ equity

    768,975            757,538       
 

 

 

       

 

 

     

Total noninterest-bearing funding sources

    1,600,105            1,505,555       
 

 

 

       

 

 

     

Total Liabilities and Shareholders’ Equity

  $ 5,923,300          $ 5,752,337       
 

 

 

       

 

 

     

Net Interest Income and Net Yield on Interest-Earning Assets

    $ 97,395        3.68     $ 97,693        3.81
   

 

 

       

 

 

   

 

(a) Income on interest-earning assets has been computed on a fully taxable equivalent basis using the 35% federal income tax statutory rate.
(b) Income on nonaccrual loans is accounted for on the cash basis, and the loan balances are included in interest-earning assets.
(c) Loan income includes loan fees earned.
(d) 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.

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. Management’s Discussion and Analysis of Financial Condition and

Results of Operations (Continued)

 

Results of Operations (Continued)

 

Net Interest Income (Continued)

 

The following table shows the effect of changes in volumes and rates on interest income and interest expense for the six-months ended June 30, 2012 compared with June 30, 2011:

 

     Analysis of Year-to-Year Changes in Net Interest  Income  
     Total
Change
    Change Due To
Volume
    Change Due To
Rate (a)
 
     (dollars in thousands)  

Interest-earning assets:

      

Interest-bearing deposits with banks

   $ (34 )   $ (31   $ (3

Tax-free investment securities

     (290     (291     1   

Taxable investment securities

     (93     2,990        (3,083

Loans

     (6,345     379        (6,724
  

 

 

   

 

 

   

 

 

 

Total interest income (b)

     (6,762     3,047        (9,809

Interest-bearing liabilities:

      

Interest-bearing demand deposits

     (111     16        (127

Savings deposits

     (1,630     127        (1,757

Time deposits

     (4,998     (2,484     (2,514

Short-term borrowings

     143        465        (322

Long-term debt

     132        269        (137
  

 

 

   

 

 

   

 

 

 

Total interest expense

     (6,464     (1,607     (4,857
  

 

 

   

 

 

   

 

 

 

Net interest income

   $ (298   $ 4,654      $ (4,952
  

 

 

   

 

 

   

 

 

 

 

(a) Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to rate variances.
(b) Changes in interest income have been computed on a fully taxable equivalent basis using the 35% federal income tax statutory rate.

Provision for Credit Losses

The provision for credit losses is determined based on management’s estimates of the appropriate level of allowance for credit losses needed to absorb probable losses inherent in the loan portfolio, after giving consideration to charge-offs and recoveries for the period. The provision for credit losses is an amount added to the allowance against which credit losses are charged.

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. Management’s Discussion and Analysis of Financial Condition and

Results of Operations (Continued)

 

Results of Operations (Continued)

 

Provision for Credit Losses (Continued)

 

The table below provides a breakout of the provision for credit losses by loan category for the six-months ended June 30:

 

     2012     2011  
     Dollars     Percentage     Dollars     Percentage  
     (dollars in thousands)  

Commercial, financial, agricultural and other

   $ 4,495        56   $ 4,171        18

Real estate construction

     1,493        18        7,747        34   

Residential real estate

     554        7        3,020        13   

Commercial real estate

     (968     (12     7,278        32   

Loans to individuals

     1,439        18        888        4   

Unallocated

     1,071        13        (175     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 8,084        100   $ 22,929        100
  

 

 

   

 

 

   

 

 

   

 

 

 

The provision for credit losses for the six-months ended June 30, 2012 decreased in comparison to the six-months ended June 30, 2011, by $14.8 million or 65%. The provision for credit losses for the six-months ended June 30, 2012, was slightly more than the $7.6 million in net credit losses for the period.

During the six-months ended June 30, 2012, there was no significant provision for credit losses related to any individual loan or loan category. The $1.1 million unallocated provision for credit losses is a result of management’s analysis of certain qualitative factors impacting the reserve for credit losses and concern over the impact of the continued difficult economic conditions being experienced by our borrowers. This analysis included factors related to portfolio risk, economic conditions and recent industry underwriting trends.

The allowance for credit losses was $61.7 million, or 1.48%, of total loans outstanding at June 30, 2012, compared to $61.2 million, or 1.51%, at December 31, 2011 and $75.2 million, or 1.88%, at June 30, 2011. The decline from 1.88% at June 30, 2011, can be attributed to a $188.1 million, or 41%, decline in criticized loans, which encompasses the $62.8 million, or 42%, decrease in nonperforming loans. Nonperforming loans as a percentage of total loans decreased to 2.04% at June 30, 2012 from 2.76% at December 31, 2011 and 3.70% as of June 30, 2011. The allowance to nonperforming loans is 73%, 62% and 51% as of June 30, 2012, December 31, 2011, and June 30, 2011, respectively. Improvement in these ratios contributed to the lower level of provision for credit losses for the six-months ended June 30, 2012.

Net credit losses were $7.6 million in the six-months ended June 30, 2012 compared to $19.0 million for the same period in 2011. The most significant credit loss recognized during the quarter was a $1.2 million partial charge-off of a commercial borrower in the shallow gas well business. Net credit losses during the six-month period did not include any other significant individual charge-offs.

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. Management’s Discussion and Analysis of Financial Condition and

Results of Operations (Continued)

 

Results of Operations (Continued)

 

Provision for Credit Losses (Continued)

 

Below is an analysis of the consolidated allowance for credit losses for the six-months ended:

 

     June 30,
2012
    December 31,
2011
    June 30,
2011
 
     (dollars in thousands)  

Balance, beginning of period

   $ 61,234 (a)    $ 75,166 (a)    $ 71,229 (a) 

Loans charged off:

      

Commercial, financial, agricultural and other

     3,668        4,157        2,957   

Real estate construction

     340        20,838        8,048   

Residential real estate

     2,454        2,407        1,700   

Commercial real estate

     541        19,286        5,575   

Loans to individuals

     1,738        1,803        1,522   
  

 

 

   

 

 

   

 

 

 

Total loans charged off

     8,741        48,491        19,802   
  

 

 

   

 

 

   

 

 

 

Recoveries of loans previously charged off:

      

Commercial, financial, agricultural and other

     275        212        261   

Real estate construction

     92        955        0   

Residential real estate

     282        36        96   

Commercial real estate

     186        185        164   

Loans to individuals

     264        284        289   
  

 

 

   

 

 

   

 

 

 

Total recoveries

     1,099        1,672        810   
  

 

 

   

 

 

   

 

 

 

Net credit losses

     7,642        46,819        18,992   

Provision charged to expense

     8,084        32,887        22,929   
  

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 61,676      $ 61,234      $ 75,166   
  

 

 

   

 

 

   

 

 

 

 

(a) The balance at the beginning of the period represents December 31, 2011, June 30, 2011 and December 31, 2010.

Noninterest Income

The following table presents the components of noninterest income for the six-months ended June 30:

 

     2012      2011      $ Change     % Change  
     (dollars in thousands)  

Noninterest Income:

          

Trust income

   $ 3,149       $ 3,482       $ (333     (10 )% 

Service charges on deposit accounts

     7,239         7,174         65        1   

Insurance and retail brokerage commissions

     3,094         3,178         (84     (3

Income from bank owned life insurance

     2,904         2,747         157        6   

Card related interchange income

     6,399         5,842         557        10   

Other income

     7,132         5,302         1,830        35   
  

 

 

    

 

 

    

 

 

   

 

 

 

Subtotal

     29,917         27,725         2,192        8   

Net securities gains

     0         2,185         (2,185     (100

Gain on sale of assets

     3,559         1,482         2,077        140   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total noninterest income

   $ 33,476       $ 31,392       $ 2,084        7
  

 

 

    

 

 

    

 

 

   

 

 

 

Noninterest income, excluding net securities gains and gains on sale of assets increased $2.2 million, or 8%, for the first half of 2012 compared to 2011. The most notable change is the change in other income. This increase is

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. Management’s Discussion and Analysis of Financial Condition and

Results of Operations (Continued)

 

Results of Operations (Continued)

 

Noninterest Income (Continued)

 

primarily the result of two components. During the first half of 2012, $0.8 million in income was recognized in relation to the mark-to-market adjustment on interest rate derivatives while $0.5 million in expense was recognized over the same time period in 2011. The increase in the mark-to-market adjustment recognized between the two periods is due to the change in the credit default curves over time as well as a change in counterparty credit risk related to the interest rate swaps during the two time periods. In addition, $0.8 million in swap fee income was earned during the six-months ended June 30, 2012, while only $0.2 million was earned during the same period of 2011. The fees earned on these swaps are based on the notional value of the initiated contracts. In comparison, eight swaps with a notional value of $77.9 million were entered into during the first half of 2012, while four swaps with a notional value of $17.7 million were entered into during the same period in 2011. These two items represent the $1.8 million dollar increase in other income.

Total noninterest income, including net securities gains and gains on sale of assets, increased $2.1 million in comparison to the six-months ended June 30, 2011. The most significant change in noninterest income, in addition to the aforementioned change due to interest rate swaps, was a $2.1 million increase in gain on sale of assets. This increase is primarily the result of the sale of three loans transferred to held for sale in the fourth quarter of 2011. The sales of these loans were completed in March, April, and June of 2012 and resulted in a $2.9 million gain. Offsetting this increase was the lack of sales of investment securities during the period compared to a $2.2 million gain in the same period of 2011.

Noninterest Expense

The following table presents the components of noninterest expense for the six-months ended June 30:

 

     2012      2011      $ Change     % Change  
     (dollars in thousands)  

Noninterest Expense:

          

Salaries and employee benefits

   $ 44,121       $ 42,674       $ 1,447        3

Net occupancy expense

     6,707         7,227         (520     (7

Furniture and equipment expense

     6,208         6,315         (107     (2

Data processing expense

     3,359         2,949         410        14   

Pennsylvania shares tax expense

     2,693         2,612         81        3   

Intangible amortization

     742         779         (37     (5

Collection and repossession expense

     3,369         3,042         327        11   

Other professional fees and services

     2,139         2,224         (85     (4

FDIC insurance

     2,499         3,083         (584     (19

Other operating expenses

     12,974         11,709         1,265        11   
  

 

 

    

 

 

    

 

 

   

 

 

 

Subtotal

     84,811         82,614         2,197        3   

Loss on sale or write-down of assets

     3,789         4,515         (726     (16
  

 

 

    

 

 

    

 

 

   

 

 

 

Total noninterest expense

   $ 88,600       $ 87,129       $ 1,471        2
  

 

 

    

 

 

    

 

 

   

 

 

 

The 2012 increase in noninterest expense is largely attributable to expenses incurred in relation to incentives paid to employees for developing customer relationships and originating loans as well as expenses incurred for unfunded commitment reserves.

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. Management’s Discussion and Analysis of Financial Condition and

Results of Operations (Continued)

 

Results of Operations (Continued)

 

Noninterest Expense (Continued)

 

Salary and employee benefits expense reflects an increase compared to the first half of 2011 primarily due to normal merit increases, the hiring of additional business development professionals and a higher level of employee incentives as a result of increased loan and deposit volumes. New loans originated during the first half of 2012 totaled $737.2 million compared to $376.1 million in the first half of 2011. The number of full-time equivalent employees decreased 80 positions from 1,512 at June 30, 2011 to 1,432 at June 30, 2012.

FDIC insurance expense decreased due to the favorable effects of changes made by the FDIC in its assessment methodology effective April 1, 2011.

The unfunded commitment reserve for the period is based on a calculation using outstanding commitments at period end, expected loss and expected usage. During the first half of 2012, this expense was impacted by increased commitments and changes in expected utilization rates.

Income Tax

The provision for income taxes increased $5.1 million for the six-months ended June 30, 2012, compared to the corresponding period in 2011. The higher provision for income taxes was primarily due to the increase in net income before tax of $15.8 million as well as a decrease in tax-exempt income of $1.2 million due to the sale of tax-exempt investment securities during the first quarter of 2011.

We applied the “annual effective tax rate approach” to determine the provision for income taxes, which applies an annual forecast of tax expense as a percentage of expected full year income for the six-months ended June 30, 2012 and 2011.

We generate an annual effective tax rate that is less than the statutory rate of 35% due to benefits resulting from tax-exempt interest, income from bank owned life insurance and tax benefits associated with low income housing tax credits, which are relatively consistent regardless of the level of pretax income. The level of tax benefits that reduce our tax rate below the 35% statutory rate produced an annual effective tax rate of 26.7% and 21.3% for the six-months ended June 30, 2012 and 2011, respectively.

As of June 30, 2012, our deferred tax assets totaled $63.9 million. Based on our evaluation as of June 30, 2012, we determined that it is more likely than not that all of these assets will be realized. As a result, we did not record a valuation allowance against these assets. In evaluating the need for a valuation allowance, we estimate future taxable income based on management approved forecasts, evaluation of historical earning levels and consideration of potential tax strategies. If future events differ from our current forecasts, we may need to establish a valuation allowance, which could have a material impact on our financial condition and results of operations.

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. Management’s Discussion and Analysis of Financial Condition and

Results of Operations (Continued)

 

Results of Operations (Continued)

 

Three-Months Ended June 30, 2012 Compared to Three-Months Ended June 30, 2011

Net Income

For the three-months ended June 30, 2012, First Commonwealth had net income of $12.3 million, or $0.12 per share, compared to net income of $7.4 million or $0.07 per share in the three-months ended June 30, 2011. The increase in net income is primarily the result of a lower provision for credit losses, lower collection and repossession expense, gains on sale of assets, loss on sale or write-down of assets, partially offset by a decrease in net securities gains.

Net Interest Income

Net interest income, on a fully taxable equivalent basis, was $48.0 million in the second quarter of 2012 compared to $48.3 million for the same period in 2011. Net interest margin, on a fully taxable equivalent basis, was 3.61% for the three-months ended June 30, 2012 compared to 3.76% for the three-months ended June 30, 2011. The taxable equivalent yield on interest-earning assets was 4.19% for the three-months ended June 30, 2012, a decrease of 44 basis points from the 4.63% for the same period in 2011.

Comparing the three months ended June 30, 2012 with the same period in 2011, changes in interest rates negatively impacted net interest income by $3.4 million. The lower yield on interest-earning assets adversely impacted net interest income by $6.0 million, while the decline in the cost of interest-bearing liabilities had a positive impact of $2.6 million. The cost of interest-bearing liabilities was 0.72% for the three months ended June 30, 2012, compared to 1.06% for the same period in 2011. 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 and increasing our investment volumes within established interest rate risk management guidelines.

While decreases in interest rates and yields compressed the interest rate margin, increases in average interest-earning assets and low cost average interest-bearing liabilities neutralized the effect on net interest income. Changes in the volumes of interest-earning assets and interest-bearing liabilities positively impacted net interest income by $3.1 million in the three-months ended June 30, 2012 compared to the same period in 2011. Higher levels of interest-earning assets resulted in an increase of $2.3 million in interest income, while volume changes primarily attributed to the mix of deposits reduced interest expense by $0.8 million

Positively affecting net interest income was a $92.7 million increase in average net free funds at June 30, 2012 as compared to June 30, 2011.

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 June 30:

 

     2012      2011  
     (dollars in thousands)  

Interest income per Condensed Consolidated Statements of Income

   $ 54,712       $ 57,989   

Adjustment to fully taxable equivalent basis

     1,090         1,409   
  

 

 

    

 

 

 

Interest income adjusted to fully taxable equivalent basis (non-GAAP)

     55,802         59,398   

Interest expense

     7,794         11,104   
  

 

 

    

 

 

 

Net interest income adjusted to fully taxable equivalent basis (non-GAAP)

   $ 48,008       $ 48,294   
  

 

 

    

 

 

 

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. Management’s Discussion and Analysis of Financial Condition and

Results of Operations (Continued)

 

Results of Operations (Continued)

 

Net Interest Income (Continued)

 

The following is an analysis of the average balance sheets and net interest income on a fully taxable equivalent basis, for the three-months ended June 30:

 

    2012     2011  
    Average
Balance
    Income /
Expense (a)
    Yield
or
Rate
    Average
Balance
    Income /
Expense (a)
    Yield
or
Rate
 
    (dollars in thousands)  

Assets

 

Interest-earning assets:

           

Interest-bearing deposits with banks

  $ 3,384      $ 1        0.12   $ 46,187      $ 27        0.23

Tax-free investment securities

    452        8        7.12        1,063        20        7.55   

Taxable investment securities

    1,207,053        8,298        2.76        1,044,340        8,570        3.29   

Loans, net of unearned income (b)(c)

    4,144,470        47,495        4.61        4,059,259        50,781        5.02   
 

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-earning assets

    5,355,359        55,802        4.19        5,150,849        59,398        4.63   
 

 

 

   

 

 

     

 

 

   

 

 

   

Noninterest-earning assets:

           

Cash

    74,465            75,651       

Allowance for credit losses

    (63,948         (80,041    

Other assets

    579,371            586,388       
 

 

 

       

 

 

     

Total noninterest-earning assets

    589,888            581,998       
 

 

 

       

 

 

     

Total Assets

  $ 5,945,247          $ 5,732,847       
 

 

 

       

 

 

     

Liabilities and Shareholders’ Equity

           

Interest-bearing liabilities:

           

Interest-bearing demand deposits (d)

  $ 648,244      $ 61        0.04   $ 615,279      $ 134        0.09

Savings deposits (d)

    1,905,168        994        0.21        1,868,862        1,963        0.42   

Time deposits

    1,165,009        4,588        1.58        1,391,168        6,996        2.02   

Short-term borrowings

    422,361        279        0.27        157,922        178        0.45   

Long-term debt

    183,890        1,872        4.09        179,675        1,833        4.09   
 

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities

    4,324,672        7,794        0.72        4,212,906        11,104        1.06   
 

 

 

   

 

 

     

 

 

   

 

 

   

Noninterest-bearing liabilities and shareholders’ equity:

           

Noninterest-bearing demand deposits (d)

    796,555            714,234       

Other liabilities

    50,724            46,036       

Shareholders’ equity

    773,296            759,671       
 

 

 

       

 

 

     

Total noninterest-bearing funding sources

    1,620,575            1,519,941       
 

 

 

       

 

 

     

Total Liabilities and Shareholders’ Equity

  $ 5,945,247          $ 5,732,847       
 

 

 

       

 

 

     

Net Interest Income and Net Yield on Interest-Earning Assets

    $ 48,008        3.61     $ 48,294        3.76
   

 

 

       

 

 

   

 

(a) Income on interest-earning assets has been computed on a fully taxable equivalent basis using the 35% federal income tax statutory rate.
(b) Income on nonaccrual loans is accounted for on the cash basis, and the loan balances are included in interest-earning assets.
(c) Loan income includes loan fees earned.
(d) 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.

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. Management’s Discussion and Analysis of Financial Condition and

Results of Operations (Continued)

 

Results of Operations (Continued)

 

Net Interest Income (Continued)

 

The following table shows the effect of changes in volumes and rates on interest income and interest expense for the three-months ended June 30, 2012 compared with June 30, 2011:

 

     Analysis of  Quarter-to-Quarter
Changes in Net Interest Income
 
     Total
Change
    Change
Due To
Volume
    Change
Due To
Rate (a)
 
     (dollars in thousands)  

Interest-earning assets:

      

Interest-bearing deposits with banks

   $ (26   $ (25   $ (1

Tax-free investment securities

     (12     (12     0   

Taxable investment securities

     (272     1,335        (1,607

Loans

     (3,286     1,066        (4,352
  

 

 

   

 

 

   

 

 

 

Total interest income (b)

     (3,596     2,364        (5,960

Interest-bearing liabilities:

      

Interest-bearing demand deposits

     (73     7        (80

Savings deposits

     (969     38        (1,007

Time deposits

     (2,408     (1,139     (1,269

Short-term borrowings

     101        297        (196

Long-term debt

     39        43        (4
  

 

 

   

 

 

   

 

 

 

Total interest expense

     (3,310     (754     (2,556
  

 

 

   

 

 

   

 

 

 

Net interest income

   $ (286   $ 3,118      $ (3,404
  

 

 

   

 

 

   

 

 

 

 

(a) Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to rate variances.
(b) Changes in interest income have been computed on a fully taxable equivalent basis using the 35% federal income tax statutory rate.

Provision for Credit Losses

The provision for credit losses is determined based on management’s estimates of the appropriate level of allowance for credit losses needed to absorb probable losses inherent in the loan portfolio, after giving consideration to charge-offs and recoveries for the period. The provision for credit losses is an amount added to the allowance against which credit losses are charged.

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. Management’s Discussion and Analysis of Financial Condition and

Results of Operations (Continued)

 

Results of Operations (Continued)

 

Provision for Credit Losses (Continued)

 

The table below provides a breakout of the provision for credit losses by loan category for the three-months ended June 30:

 

     2012     2011  
     Dollars     Percentage     Dollars     Percentage  
     (dollars in thousands)  

Commercial, financial, agricultural and other

   $ 2,876        67   $ 2,579        28

Real estate construction

     1,688        39        1,971        22   

Residential real estate

     510        12        707        8   

Commercial real estate

     (1,455     (34     3,327        36   

Loans to individuals

     608        14        618        7   

Unallocated

     70        2        (90     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 4,297        100   $ 9,112        100
  

 

 

   

 

 

   

 

 

   

 

 

 

The provision for credit losses for the three-months ended June 30, 2012 decreased in comparison to the three-months ended June 30, 2011, by $4.8 million or 53%. The provision for credit losses for the three-months ended June 30, 2012, was slightly more than the $3.4 million in net credit losses for the period.

Net credit losses were $3.4 million in the three-months ended June 30, 2012 compared to $10.7 million for the same period in 2011. Net credit losses during the three-month period did not include any significant individual charge-offs.

Below is an analysis of the consolidated allowance for credit losses for the three-months ended:

 

     June 30,     March 31,     June 30,  
     2012     2012     2011  
     (dollars in thousands)  

Balance, beginning of period

   $ 60,732 (a)    $ 61,234 (a)    $ 76,792 (a) 

Loans charged off:

      

Commercial, financial, agricultural and other

     1,754        1,914        1,997   

Real estate construction

     150        190        3,049   

Residential real estate

     742        1,712        596   

Commercial real estate

     306        235        4,809   

Loans to individuals

     797        941        743   
  

 

 

   

 

 

   

 

 

 

Total loans charged off

     3,749        4,992        11,194   
  

 

 

   

 

 

   

 

 

 

Recoveries of loans previously charged off:

      

Commercial, financial, agricultural and other

     37        238        157   

Real estate construction

     36        56        0   

Residential real estate

     149        133        77   

Commercial real estate

     28        158        88   

Loans to individuals

     146        118        134   
  

 

 

   

 

 

   

 

 

 

Total recoveries

     396        703        456   
  

 

 

   

 

 

   

 

 

 

Net credit losses

     3,353        4,289        10,738   

Provision charged to expense

     4,297        3,787        9,112   
  

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 61,676      $ 60,732      $ 75,166   
  

 

 

   

 

 

   

 

 

 

 

(a) The balance at the beginning of the period represents March 31, 2012, December 31, 2011 and March 31, 2011.

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. Management’s Discussion and Analysis of Financial Condition and

Results of Operations (Continued)

 

Results of Operations (Continued)

 

Provision for Credit Losses (Continued)

 

Noninterest Income

The following table presents the components of noninterest income for the three-months ended June 30:

 

     2012      2011      $ Change     % Change  
     (dollars in thousands)  

Noninterest Income:

          

Trust income

   $ 1,607       $ 1,764       $ (157     (9 )% 

Service charges on deposit accounts

     3,737         3,748         (11     (0

Insurance and retail brokerage commissions

     1,670         1,616         54        3   

Income from bank owned life insurance

     1,459         1,390         69        5   

Card related interchange income

     3,285         3,042         243        8   

Other income

     2,894         2,645         249        9   
  

 

 

    

 

 

    

 

 

   

 

 

 

Subtotal

     14,652         14,205         447        3   

Net securities gains

     0         1,608         (1,608     (100

Gain on sale of assets

     1,444         1,251         193        15   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total noninterest income

   $ 16,096       $ 17,064       $ (968     (6 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Noninterest income, excluding net securities gains and gains on sale of assets, increased $0.5 million or 3% for the second quarter of 2012 compared to 2011. Total noninterest income decreased $1.0 million primarily due to the lack of net securities gains during the three-months ended June 30, 2012. During the same period in 2011, a majority of our state and municipal securities portfolio was sold resulting in net security gains of $1.6 million. There was no similar activity during the current period.

Noninterest Expense

The following table presents the components of noninterest expense for the three-months ended June 30:

 

     2012      2011      $ Change     % Change  
     (dollars in thousands)  

Noninterest Expense:

          

Salaries and employee benefits

   $ 22,363       $ 21,546       $ 817        4

Net occupancy expense

     3,303         3,495         (192     (5

Furniture and equipment expense

     3,024         3,135         (111     (4

Data processing expense

     1,796         1,525         271        18   

Pennsylvania shares tax expense

     1,510         1,434         76        5   

Intangible amortization

     371         389         (18     (5

Collection and repossession expense

     670         1,726         (1,056     (61

Other professional fees and services

     940         1,099         (159     (14

FDIC insurance

     1,262         1,248         14        1   

Other operating expenses

     6,109         5,889         220        4   
  

 

 

    

 

 

    

 

 

   

 

 

 

Subtotal

     41,348         41,486         (138     (0

Loss on sale or write-down of assets

     500         4,214         (3,714     (88
  

 

 

    

 

 

    

 

 

   

 

 

 

Total noninterest expense

   $ 41,848       $ 45,700       $ (3,852     (8 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. Management’s Discussion and Analysis of Financial Condition and

Results of Operations (Continued)

 

Results of Operations (Continued)

 

Noninterest Expense (Continued)

 

The 2012 decrease in noninterest expense is largely attributable to a reduced level of expenses related to resolving problem commercial credits. Compared to the second quarter of 2011, credit collection costs decreased $1.1 million and loss on sale or write-down of assets decreased $3.7 million.

Salary and employee benefits expense reflects an increase compared to the second quarter of 2011 primarily due to normal merit increases, the hiring of additional business development professionals and a higher level of employee incentives as a result of increased loan and deposit volumes. New loans originated during the second quarter of 2012 totaled $316.0 million compared to $212.5 million in the second quarter of 2011.

Collection and repossession expense decreased when comparing second quarter 2012 to the same period in 2011, primarily as a result of expenses recognized in the prior period to maintain one OREO property.

The most significant decrease in noninterest expense is the decrease on loss on sale or write-down of assets. In June 2011, an updated appraisal was received for one OREO property in central Pennsylvania resulting in a $4.1 million write-down. There were no comparable expenses in the current quarter.

Income Tax

The provision for income taxes increased $2.8 million for the three-months ended June 30, 2012, compared to the corresponding period in 2011. The higher provision for income taxes was primarily due to the increase in net income before tax of $7.7 million as well as a decrease in tax-exempt income of $0.6 million due to the sale of tax-exempt investment securities during the first quarter of 2011.

The level of tax benefits that reduce our tax rate below the 35% statutory rate produced an annual effective tax rate of 27.0% and 18.8% for the three-months ended June 30, 2012 and 2011, respectively.

Liquidity

Liquidity refers to our ability to meet the cash flow requirements of depositors and borrowers as well as our operating cash needs with cost-effective funding. We generate funds to meet these needs primarily through the core deposit base of First Commonwealth Bank and the maturity or repayment of loans and other interest-earning

assets, including investments. During the first six months of 2012, liquidity provided from the $136.2 million increase in short-term and long-term borrowings and the net decrease of $15.9 million in investment securities provided funds to originate loans. We also have available unused wholesale sources of liquidity, including overnight federal funds and repurchase agreements, advances from the FHLB of Pittsburgh, borrowings through the discount window at the Federal Reserve Bank (“FRB”) of Cleveland and access to certificates of deposit through brokers.

In order to increase and diversify our funding sources, we participate in the Certificate of Deposit Account Registry Services (“CDARS”) program as part of an Asset/Liability Committee (“ALCO”) strategy to increase and diversify funding sources. As of June 30, 2012, our maximum borrowing capacity under this program was $885.5 million and as of that date there was $15.2 million outstanding. We also participate in a reciprocal program which allows our depositors to receive expanded FDIC coverage by placing multiple certificates of deposit at other CDARS member banks. As of June 30, 2012, our outstanding certificates of deposits from this program have an average weighted rate of 0.55% and an average original term of 277 days.

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. Management’s Discussion and Analysis of Financial Condition and

Results of Operations (Continued)

 

Liquidity (Continued)

 

An additional source of liquidity is the FRB Borrower-in-Custody of Collateral program which enables us to pledge certain loans, not being used as collateral at the FHLB, as collateral for borrowings at the FRB. At June 30, 2012, the borrowing capacity under this program totaled $788.1 million and there were no amounts outstanding.

Additionally, as of June 30, 2012, our maximum borrowing capacity at the FHLB of Pittsburgh was $1.2 billion and as of that date amounts used against this capacity included $339.3 million in outstanding borrowings and $19.5 million in letter of credit commitments used for pledging public funds.

First Commonwealth Financial Corporation has an unsecured $15.0 million line of credit with another financial institution and as of June 30, 2012 there are no amounts outstanding on this line. Additionally, we guarantee a $0.6 million ESOP loan. For this loan we are currently not meeting the debt covenant related to return on average assets. We are working with the lender and expect to obtain a waiver or modification for this covenant.

First Commonwealth’s long-term liquidity source is its core deposit base. Core deposits are the most stable source of liquidity a bank can have due to the long-term relationship with a deposit customer. The level of deposits during any period is influenced by factors outside of management’s control, such as the level of short-term and long-term market interest rates and yields offered on competing investments, such as money market mutual funds. During the first six months of 2012, total deposits decreased $42.7 million. The following table shows a breakdown of the components of First Commonwealth’s deposits:

 

     June 30,      December 31,  
     2012      2011  
     (dollars in thousands)  

Noninterest-bearing demand deposits

   $ 823,880       $ 780,377   

Interest-bearing demand deposits

     98,937         95,945   

Savings deposits

     2,415,860         2,430,802   

Time deposits

     1,123,285         1,197,560   
  

 

 

    

 

 

 

Total

   $ 4,461,962       $ 4,504,684   
  

 

 

    

 

 

 

At June 30, 2012, noninterest-bearing demand deposits increased by $43.5 million and interest-bearing deposits decreased $86.2 million compared to December 31, 2011. The growth in interest-bearing deposits is consistent across deposit types and represents positive results of marketing promotions aimed at attracting new and retaining existing customers.

Market Risk

The following gap analysis compares the difference between the amount of interest-earning assets and interest-bearing liabilities subject to repricing over a period of time. The ratio of rate sensitive assets to rate sensitive liabilities repricing within a one-year period was 0.77 at June 30, 2012 and 0.76 at December 31, 2011. A ratio of less than one indicates a higher level of repricing liabilities over repricing assets over the next twelve months.

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. Management’s Discussion and Analysis of Financial Condition and

Results of Operations (Continued)

 

Market Risk (Continued)

 

Gap analysis has limitations due to the static nature of the model that holds volumes and consumer behaviors constant in all economic and interest rate scenarios. Rate sensitive assets to rate sensitive liabilities repricing in one year would indicate reduced net interest income in a rising interest rate scenario, and conversely, increased net interest income in a declining interest rate scenario. Following is the gap analysis as of June 30, 2012 and December 31, 2011:

 

     June 30, 2012  
     0-90 Days     91-180
Days
    181-365
Days
    Cumulative
0-365 Days
    Over 1 Year
Through 5
Years
    Over 5
Years
 
     (dollars in thousands)  

Loans

   $ 1,893,364      $ 188,808      $ 384,352      $ 2,466,524      $ 1,422,828      $ 192,796   

Investments

     120,470        139,300        122,760        382,530        475,239        331,480   

Other interest-earning assets

     3,839        0        0        3,839        0        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-sensitive assets (ISA)

     2,017,673        328,108        507,112        2,852,893        1,898,067        524,276   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Certificates of Deposit

     271,507        152,035        209,326        632,868        480,337        10,080   

Other deposits

     2,514,797        0        0        2,514,797        0        0   

Borrowings

     547,180        150        29,855        577,185        38,682        39,517   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-sensitive liabilitites (ISL)

     3,333,484        152,185        239,181        3,724,850        519,019        49,597   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gap

   $ (1,315,811   $ 175,923      $ 267,931      $ (871,957   $ 1,379,048      $ 474,679   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ISA/ISL

     0.61        2.16        2.12        0.77        3.66        10.57   

Gap/Total assets

     22.13     2.96     4.51     14.66     23.19     7.98
     December 31, 2011  
     0-90 Days     91-180
Days
    181-365
Days
    Cumulative
0-365 Days
    Over 1 Year
Through 5
Years
    Over 5
Years
 
     (dollars in thousands)  

Loans

   $ 1,859,623      $ 156,447      $ 287,873      $ 2,303,943      $ 1,486,729      $ 174,495   

Investments

     125,112        107,723        205,335        438,170        418,413        320,739   

Other interest-earning assets

     3,511        0        0        3,511        0        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-sensitive assets (ISA)

     1,988,246        264,170        493,208        2,745,624        1,905,142        495,234   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Certificates of Deposit

     154,218        192,154        323,085        669,457        517,572        10,531   

Other deposits

     2,526,747        0        0        2,526,747        0        0   

Borrowings

     386,683        25,147        299        412,129        68,334        39,728   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-sensitive liabilitites (ISL)

     3,067,648        217,301        323,384        3,608,333        585,906        50,259   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gap

   $ (1,079,402   $ 46,869      $ 169,824      $ (862,709   $ 1,319,236      $ 444,975   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ISA/ISL

     0.65        1.22        1.53        0.76        3.25        9.85   

Gap/Total assets

     18.48     0.80     2.91     14.77     22.59     7.62

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. Management’s Discussion and Analysis of Financial Condition and

Results of Operations (Continued)

 

Market Risk (Continued)

 

The following table presents an analysis of the potential sensitivity of our annual net interest income to gradual changes in interest rates over a 12 month time frame versus if rates remained unchanged utilizing a flat balance sheet.

 

     Net interest income change (12 months)  
     -200     -100     +100      +200  
     (dollars in thousands)  

June 30, 2012

   $ (8,551   $ (5,135   $ 381       $ 1,737   

December 31, 2011

     (7,787     (3,997     704         2,324   

The analysis and model used to quantify the sensitivity of our net interest income becomes less reliable in a decreasing 200 basis point scenario given the current low interest rate environment. Results of the 100 and 200 basis point decline in interest rate scenario are affected by the fact that many of our interest-bearing liabilities are at rates below 1% and therefore cannot decline 100 or 200 basis points, yet our interest-sensitive assets are able to decline by these amounts. In the six-month period ended June 30, 2012 and 2011, the cost of our interest-bearing liabilities averaged 0.76% and 1.08%, respectively, and the yield on our average interest-earning assets, on a fully taxable equivalent basis, averaged 4.29% and 4.70%, respectively.

The ALCO is responsible for the identification and management of interest rate risk exposure. As such, the ALCO continuously evaluates strategies to manage our exposure to interest rate fluctuations.

Asset/liability models require certain assumptions be made, such as prepayment rates on earning assets and pricing impact on non-maturity deposits, which may differ from actual experience. These business assumptions are based upon our experience, business plans and published industry experience. While management believes such assumptions to be reasonable, there can be no assurance that modeled results will approximate actual results.

Credit Risk

First Commonwealth maintains an allowance for credit losses at a level deemed sufficient to absorb losses inherent in the loan portfolio at the date of 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 impaired loans with a balance greater than $0.1 million, loss experience trends, delinquency and other relevant factors. While allocations are made to specific loans and pools of loans, the total allowance is available for all loan losses.

Nonperforming loans include nonaccrual loans and loans classified as troubled debt restructurings. Nonaccrual loans represent loans on which interest accruals have been discontinued. Troubled debt restructured loans are those loans whose terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the deteriorating financial position of the borrower, who could not obtain comparable terms from alternative financing sources. In the first half of 2012, five relationship totaling $7.5 million was identified as troubled debt restructuring. Please refer to Note 10 “Loans and Allowance for Credit Losses” for additional information on troubled debt restructuring.

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. Management’s Discussion and Analysis of Financial Condition and

Results of Operations (Continued)

 

Credit Risk (Continued)

 

We discontinue interest accruals on a loan when, based on current information and events, it is probable that we will be unable to fully collect principal or interest due according to the contractual terms of the loan. A loan is also placed in nonaccrual status when, based on regulatory definitions, the loan is maintained on a “cash basis” due to the weakened financial condition of the borrower. The bank excludes from nonaccrual status any loans contractually past due 90 days or more as to interest or principal payments if they are well secured and in the process of collection.

Nonperforming loans are closely monitored on an ongoing basis as part of our loan review and work-out process. The probable risk of loss on these loans is evaluated by comparing the loan balance to the fair value of any underlying collateral or the present value of projected future cash flows. Losses or specifically assigned allowance for loan losses are recognized where appropriate.

The allowance for credit losses was $61.7 million at June 30, 2012 or 1.48% of total loans outstanding compared to 1.51% reported at December 31, 2011 and 1.88% at June 30, 2011. The stability in the June 30, 2012 ratio when compared to December 31, 2011 can be primarily attributable to a $1.5 million decrease in specific reserves resulting from a $13.8 million decrease in nonperforming loans coupled with $115.9 million in loan growth, particularly in commercial loans. Complementing the decrease in nonaccrual loans is a decrease in other credits measures. The level of criticized loans improved as of June 30, 2012 compared to December 31, 2011, as criticized loans decreased $19.5 million, or 7% and delinquency on accruing loans for the same period declined $1.9 million, or 5%.

The allowance for credit losses as a percentage of nonperforming loans was 73% as of June 30, 2012 compared to 62% at December 31, 2011 and 51% at June 30, 2011. The amount of allowance related to nonperforming loans was determined by using fair values obtained from current appraisals and updated discounted cash flow analyses. The allowance for credit losses includes specific allocations of $11.7 million related to nonperforming loans covering 14% of the total nonperforming balance. 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, 2012.

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. Management’s Discussion and Analysis of Financial Condition and

Results of Operations (Continued)

 

Credit Risk (Continued)

 

The following table provides information related to nonperforming assets, the allowance for credit losses and other credit-related measures;

 

    June 30,     December  31,
2011
 
    2012     2011    
    (dollars in thousands)  

Nonperforming Loans:

 

Loans on nonaccrual basis

  $ 33,457      $ 89,974      $ 33,635   

Loans held for sale on a nonaccrual basis

    0        823        13,412   

Troubled debt restructured loans on nonaccrual basis

    45,235        22,693        44,841   

Troubled debt restructured loans on accrual basis

    6,251        34,208        20,276   
 

 

 

   

 

 

   

 

 

 

Total nonperforming loans

  $ 84,943      $ 147,698      $ 112,164   
 

 

 

   

 

 

   

 

 

 

Loans past due in excess of 90 days and still accruing

  $ 10,587      $ 12,960      $ 11,015   

Other real estate owned

  $ 19,140      $ 36,507      $ 30,035   

Loans outstanding at end of period

  $ 4,159,531      $ 3,992,058      $ 4,057,055   

Average loans outstanding

  $ 4,129,977 (a)    $ 4,114,862 (a)    $ 4,061,822 (b) 

Nonperforming loans as a percentage of total loans

    2.04     3.70     2.76

Provision for credit losses

  $ 8,084 (a)    $ 22,929 (a)    $ 55,816 (b) 

Allowance for credit losses

  $ 61,676      $ 75,166      $ 61,234   

Net charge-offs

  $ 7,642 (a)    $ 18,992 (a)    $ 65,811 (b) 

Net charge-offs as a percentage of averge loans outstanding (annualized)

    0.37     0.93     1.62

Provision for credit losses as a percentage of net charge-offs

    105.78 %(a)      120.73 %(a)      84.81 %(b) 

Allowance for credit losses as a percentage of end-of-period loans outstanding (c)

    1.48     1.88     1.51

Allowance for credit losses as a percentage of nonperforming loans (c)

    72.61     51.18     62.01

 

(a) For the three-month period ended.
(b) For the twelve-month period ended.
(c) End of period loans and nonperforming loans exclude loans held for sale.

During the first half of 2012, accruing troubled debt restructured loans decreased $14.0 million from December 31, 2011. During the first quarter of 2012, an $11.3 million loan to a waste management company in Pennsylvania paid off due to the sale of the business. In addition, a $2.2 million loan to a retail development company in western Pennsylvania paid off during the first quarter.

The following tables show the outstanding balances of our loan portfolio and the breakdown of net charge-offs and nonperforming loans by loan type as of and for the periods presented:

 

     June 30, 2012     December 31, 2011  
     Amount      %     Amount      %  
     (dollars in thousands)  

Commercial, financial, agricultural and other

   $ 1,059,675         25   $ 996,739         25

Real estate construction

     77,442         2        76,564         2   

Residential real estate

     1,213,610         29        1,137,059         28   

Commercial real estate

     1,232,270         30        1,267,432         31   

Loans to individuals

     576,534         14        565,849         14   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans and leases net of unearned income

   $ 4,159,531         100   $ 4,043,643         100
  

 

 

      

 

 

    

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. Management’s Discussion and Analysis of Financial Condition and

Results of Operations (Continued)

 

Credit Risk (Continued)

 

     For the Six-Months Ending        
     June 30, 2012     As of June 30, 2012  
     Net
Charge-

offs
     % of
Total Net
Charge-offs
    Net Charge-
offs as a% of
Average
Loans
    Nonperforming
Loans (a)
     % of Total
Nonperforming
Loans
    Nonperforming
Loans as a% of

Total Loans
 
     (dollars in thousands)  

Commercial, financial, agricultural and other

   $ 3,393         44.40     0.16   $ 31,975         37.64     0.77

Real estate construction

     248         3.24        0.01        15,060         17.73        0.36   

Residential real estate

     2,172         28.42        0.11        4,870         5.73        0.12   

Commercial real estate

     355         4.65        0.02        33,038         38.90        0.79   

Loans to individuals

     1,474         19.29        0.07        0         0.00        0.00   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total loans, net of unearned income

   $ 7,642         100.00     0.37   $ 84,943         100.00     2.04
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(a) Nonperforming loan balances do not include loans held for sale.

As the above table illustrates, three categories of loans—commercial, financial, agricultural and other, real estate construction and commercial real estate—were a significant portion of the nonperforming loans as of June 30, 2012. See discussions related to the provision for credit losses and loans for more information.

Capital Resources

At June 30, 2012, shareholders’ equity was $772.5 million, an increase of $13.9 million from December 31, 2011. The increase was primarily the result of $23.4 million net income offset by $8.4 million of dividends paid to shareholders. Additionally, other comprehensive income increased $0.8 million due to changes in the fair value of available for sale investments and unearned ESOP shares decreased $1.0 million. Cash dividends declared per common share were $0.08 and $0.06 for the six-months ended June 30, 2012 and 2011, respectively.

First Commonwealth is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on First Commonwealth’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, First Commonwealth and its banking subsidiary must meet specific capital guidelines that involve quantitative measures of First Commonwealth’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. First Commonwealth’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.

Quantitative measures established by regulation to ensure capital adequacy require First Commonwealth to maintain minimum amounts and ratios of Total and Tier I capital (common and certain other “core” equity capital) to risk weighted assets, and of Tier I capital to average assets. As of June 30, 2012, First Commonwealth and its banking subsidiary met all capital adequacy requirements to which they are subject.

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. Management’s Discussion and Analysis of Financial Condition and

Results of Operations (Continued)

 

Capital Resources (Continued)

 

The table below presents First Commonwealth’s capital position at June 30, 2012.

 

     Actual     Regulatory
Minumum
    Well
Capitalized
Regulatory
 
     Capital
Amount
     Ratio     Capital
Amount
     Ratio     Capital
Amount
     Ratio  
     (dollars in thousands)  

Total Capital to Risk Weighted Assets

               

First Commonwealth Financial Corporation

   $ 735,759         15.2   $ 388,295         8.0     

First Commonwealth Bank

     703,004         14.5        387,436         8.0      $ 484,295         10.0

Tier I Capital to Risk Weighted Assets

               

First Commonwealth Financial Corporation

   $ 675,049         13.9   $ 194,147         4.0     

First Commonwealth Bank

     642,427         13.3        193,718         4.0      $ 290,577         6.0

Tier I Capital to Average Assets

               

First Commonwealth Financial Corporation

   $ 675,049         11.8   $ 229,702         4.0     

First Commonwealth Bank

     642,427         11.3        227,823         4.0      $ 284,779         5.0

On June 19, 2012, the company announced a $50 million common stock repurchase program effective until December 31, 2012. As of June 30, 2012, 469,700 shares were repurchased at an average price of $6.48 per share.

On July 24, 2012, First Commonwealth Financial Corporation declared a quarterly dividend of $0.05 per share payable on August 17, 2012.

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Information appearing in Item 2 of this report under the caption “Market Risk” is incorporated by reference in response to this item.

ITEM 4. Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our 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”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit 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.

In addition, our management, including our Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal controls over financial reporting to determine whether any changes occurred during the current fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. No such changes were identified in connection with this evaluation.

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

PART II – OTHER INFORMATION

 

ITEM 1.    LEGAL PROCEEDINGS
   The information required by this Item is set forth in the “Legal proceedings” section in Part I, Item 1, Note 6 “Commitments and Contingent Liabilities” which is incorporated herein by reference in response to this item.
ITEM 1A.    RISK FACTORS
   For a discussion of certain risk factors affecting the Company, see Part I, Item 1A: Risk Factors of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, and Forward-Looking Statements on page 42 of this Form 10-Q..
ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   On June 19, 2012, the Company announced a share repurchase program through which the Board of Directors authorized management to repurchase up to $50.0 million of the Company’s common stock. At the close price of $6.22 on June 18, 2012, the authorized program represents approximately 8.0 million shares of common stock. The following table details the amount of shares repurchased under this program during the second quarter of 2012:

 

Month Ending:

   Total Number of
Shares
Purchased
     Average Price
Paid per Share
(or Unit)
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
     Maximum Number
of Shares that

May Yet Be
Purchased Under
the Plans or
Programs
 

April 30, 2012

     0       $ 0.00         0         0   

May 31, 2012

     0         0.00         0         0   

June 30, 2012

     469,700         6.48         469,700         6,977,027
  

 

 

    

 

 

    

 

 

    

Total

     469,700       $ 6.48         469,700      
  

 

 

    

 

 

    

 

 

    
  

 

*       Remaining number of shares approved under the Plan is estimated based on the market value of the Company’s common stock of $6.73 at June 30, 2012.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES
   None
ITEM 4.    MINE SAFETY DISCLOSURES
   Not applicable
ITEM 5.    OTHER INFORMATION
   None

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

PART II – OTHER INFORMATION

 

ITEM 6.      EXHIBITS

 

Exhibit
Number

  

Description

  

Incorporated by Reference to

31.1    Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002    Filed herewith
31.2    Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002    Filed herewith
32.1    Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    Filed herewith
32.2    Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    Filed herewith
101    Interactive Data File (XBRL)    Furnished herewith

 

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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)

 

DATED: August 7, 2012   /s/ T. Michael Price
 

T. Michael Price

President and Chief Executive Officer

DATED: August 7, 2012   /s/ Robert E. Rout
 

Robert E. Rout

Executive Vice President and

Chief Financial Officer

 

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